Gold price buoyed by geopolitical tensions

The price of gold has been exhibiting high volatility the past few days, spurred by the Ukrainian crisis rollercoaster. Mounting geopolitical tensions support the price of gold, as risk appetite diminishes and demand for safer assets grows. 

The Russian President, Vladimir Putin, signed a decree on Monday recognising the independence of the two separatist regions Donetsk and Luhansk in eastern Ukraine. Immediately afterward he ordered Russian troops into these regions, in a ‘peacekeeping’ mission as he declared, violating Ukraine’s sovereignty and effectively launching an invasion against Ukraine. 

The US President, Joe Biden, announced on Tuesday the "first tranche" of measures against Russia, which aim to deliver a hard blow on the country’s economy, including sanctions on Russia's foreign debt so that the country can no longer raise money for its state financing. Australia, Canada, and Japan have also announced sanctions against Russia, targeting Russian banks and oligarchs, while NATO has positioned additional US troops to the Baltic nations bordering Russia.

The EU foreign policy chief Josep Borrell stated that EU members states have unanimously agreed upon a package of new sanctions against Russia. More importantly, Germany has suspended the approval of the Nord Stream 2 pipeline, a move that may cause an energy crisis in Europe, which depends on Russia for approximately 40% of its gas and send the prices of energy-related assets even higher. Britain has moved to sanction Russian individuals and banking institutions in the UK, while it is reported that further sanctions are on the table. 

Mounting geopolitical tensions also send inflation rates up, as the value of certain commodities, and especially of energy-related assets, increases. The price of gold benefits from rising inflation, since the metal is often used as an inflation hedge.

Treasury yields rose on Wednesday, as the impact of the developments in the Russia – Ukraine crisis started to wear off and markets moved towards stabilization. Rising yields put pressure on the price of gold and compete directly with gold as an investment, as gold does not pay dividends or interest. 

The gold price was catapulted to $1,914 per ounce on Monday, following Putin’s announcement but fell to $1,901 per ounce on Tuesday. On Wednesday, it climbed again, reaching above $1,911 per ounce. If the price of gold continues to rise, it may find resistance near its June 2021 high at $1,917 per ounce, while if it decreases, support may be found at 1,782 per ounce.  

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Written by:
Myrsini Giannouli

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