Gold: Tailwinds and headwinds from the war in Ukraine

Somewhat surprising, gold prices remained rangebound in recent weeks despite the war in Ukraine still raging with no solution in sight. The market is currently facing tailwinds from very strong safe-haven demand and headwinds from a strengthening US dollar and rising real US bond yields.

Looking ahead, the key question for gold remains if economic or financial market risks related to the war are rising or receding.

During the past few weeks, gold prices remained rangebound at around $1,930 per ounce. As the war in Ukraine is still raging and no solution is in sight, this may seem surprising. Taking a closer look at the dominant drivers of gold prices, they are currently providing both tailwinds and headwinds, ultimately resulting in a rangebound price pattern. In terms of tailwinds, safe-haven demand sticks out.

Holdings of physically-backed gold products, our preferred gauge of safe-haven demand, have recorded inflows of over 185 tonnes since the war broke out. Both the speed and size of these inflows are similar to past crises.

The demand for smaller gold bars and coins is also strong, for example, indicated by sales of the US American Eagle, for which volumes have been trending at the upper end of the five-year range since the war broke out.

Meanwhile, gold demand from more speculative and short-term traders has hardly picked up, as evidenced by their positioning in the futures market. Shifting to the headwinds, these are primarily coming from the US dollar, which itself is a safe haven in times of crisis, and US real bond yields.

The dollar has reached the highest level in around two years, which is also the case for real bond yields as the increase in nominal yields has outpaced inflation expectations. Adding to these headwinds, the outstanding value of negatively yielding bonds worldwide has dropped from almost $18 billion at the beginning of the year to less than $3 billion. Hence, after the sharp sell-off, the bond market is again available for shelter for safe-haven seekers.

The key question for gold remains if economic or financial market risks related to the war are rising or receding. Rising risks would mean higher prices, for example, due to the active involvement of NATO troops along the Ukrainian borders or a broad-based energy embargo against Russia.

Receding risks would mean stagnant or somewhat lower prices, for example, due to a shifting of the fighting solely to the eastern parts of Ukraine. We still see gold as rather expensive insurance despite trading below its recent peaks.

(Carsten Menke is the Head of Next Generation Research at Julius Baer)