(Kitco News) – Once again, the gold market has disappointed and frustrated a lot of investors after seeing a nearly $100 intraday swing Thursday.
As Russian soldiers invaded Ukraine, gold prices pushed to a session high of $1,976.50 an ounce, its highest level in 1.5 years. However, we have warned investors and traders before of the risks in playing gold as a geopolitical safe haven.
The problem with that gold play is if geopolitical uncertainty doesn’t escalate, then the momentum can’t be sustained. We have seen this scenario numerous times in the last decade, and gold has ended up lower than where it began.
While you shouldn’t chase gold on one geopolitical conflict, that doesn’t mean it is not an effective safe-haven asset. According to some analysts, instead of focusing on the day-to-day volatility, investors need to view gold from a long-term perspective.
Along with the humanitarian tragedy unfolding in Ukraine, this conflict will significantly impact the global economy. Ukraine is the third-largest exporter of wheat. It is also an important player in the energy market. This new conflict threatens global food and energy supply chains, which could drive inflation higher.
Analysts had pointed out that the growing inflation threat drove the gold market into a new bullish uptrend long before Russia started its pretend war games. This is an insidious threat that continues to grow.
Friday, U.S. consumer prices rose higher than expected with core PCE, the Federal Reserve’s preferred inflation gauge, rising to 5.2%, its highest level since 1983. This is not any new information, but it shows that rising prices are not going anywhere, and we don’t know how this is going to end.
But it’s not just the U.S., consumer prices in Canada hit a fresh 30-year high. According to some analysts and economists, rising prices in Europe could create a new recession.
Consumers are seeing their purchasing power erode consistently, which means consumption will fall. Inflation pressures are driving interest rates higher, with the 10-year bond yield hovering around 2%. This environment will add further volatility to equity markets, forcing investors to de-risk.
We are already seeing some of that de-risking in cryptocurrencies as bitcoin prices have fallen 23% so far this year.
The problem investors face, and the question they are asking is where to put their capital. While bond yields have moved higher, at 2%, you would still lose money in real terms, with inflation at 5.2%. Headline inflation rose 6.9% last month.
Gold is one of the last pillars of safety in the global financial market. It has no correlation to equities and has no counter-party risk, making it an important diversification tool.
As frustrating as gold’s daily price action can be, it still remains an important asset for investors.