Ukraine invasion pushing gold prices higher

Russia’s invasion of Ukraine and the resulting global economic turmoil is likely to propel further rises in gold prices, spurring higher profits for mining companies.

But firms are braced for cost inflation shocks and price volatility as the conflict continues.

GOLD SURGE

Following gains earlier in the year, in part due to tensions in the region, gold rose to US$1,968/oz in London – its highest level since September 2020 – on the first day of the invasion on February 24.

And despite volatility in part due to profit-taking by investors, the precious metal has held its ground above US$1,900/oz, closing at US$1,920/oz on Tuesday, up from around US$1,800/oz at the end of January.

“A flight to safe-haven assets by market participants is a direct result of the Russian invasion and rising inflation levels, with gold prices continuing to move higher in an almost parabolic fashion,” Kitco commentator Gary Wagner said in a note on Tuesday.

“With the current inflationary pressures rising and the crisis resulting from Russia’s illegal invasion of a sovereign nation, it seems highly plausible that gold could reach over US$2,000/oz,” he added.

MARKET COLLAPSE

Some mining industry leaders also remain bullish on the precious metal, which serves as an important reserve of wealth, particularly during world crises.

The invasion, now in its seventh day as Russia’s advances have slowed under sustained resistance from Ukraine’s military, poses a serious risk to the global economy, according to Barrick Gold CEO Mark Bristow.

Toronto-based Barrick is Latin America’s second biggest gold producer with mines in the Dominican Republic and Argentina.

“If this goes on much longer, and this is a serious confrontation… the threat of that is to collapse the market,” Bristow said in an interview with Kitco News.

“At times like this it’s always important to have some gold in your portfolio, and... we are immediately long on gold. That’s a positive for gold miners.”

Global gold production has stagnated in recent years as few major new mines have entered production, with output at 3,000t in 2021, down 30t from the previous year, according to data from the US Geological Survey.

Mexico, Peru, Brazil, Argentina and Colombia are Latin America’s main gold producers, with output ranging from 50-100t last year.

Russia was the third biggest gold producer in 2021 at 300t, behind China and Australia, according to the USGS. It remains to be seen what impact sanctions imposed by Western countries have on production.

“Gold may also be affected given Russia is either the world’s second or third largest gold producer and if sanctions prevent the Russian gold producers from accessing international markets to sell their output that could reduce gold supply availability worldwide,” Sharps Pixley’s Lawrie Williams said in a note last week.

“It could, however, also force the Russian central bank to restart increasing its gold reserves by buying up the gold which may no longer be destined for international markets.”

While mining companies will need to grapple with rising costs, including of energy following oil and gas price spikes as a result of the conflict, the inflationary environment remains a supportive base for gold, Bristow added.

FOUR SCENARIOS

US-based precious metals analysis consultancy CPM Group shares the view that the conflict may push gold higher, but prices will be volatile.

“We are looking at prices that will remain volatile, that have the potential to spike higher,” managing partner Jeffrey Christian said in a webinar.

Prices are likely to stay in the US$1,890-1,976/oz range for the next few days, with silver also remaining very volatile.

But what happens next will depend on how the conflict advances. CPM Group has identified four potential scenarios, each of which will have different implications for gold.

“We expect it [gold] to come back down in a Russian victory. Silver is in a similar situation,” Christian said.

“If Ukraine holds off the advance… then I think prices will continue... bouncing around in a very volatile way, but we don’t necessarily see new highs there.”

A third scenario involves the conflict bogging down and continuing for a long time.

“This probably means that prices of gold and silver remain higher than they have been but don’t necessarily rise sharply,” he added.

“There’s a fourth scenario. It’s possible that Nato gets sucked in to this war. This raises the stakes.

“It probably raises the prices of gold and silver at least in the near-term.”

But gold is likely to give up its gains over the longer term, according to some experts.

“While the conflict continues and tensions between Russia and the West remain high, we expect gold prices to continue rising, but they should eventually fall due to rising US real yields,” analysts at Capital Economics said in a note.