Last month, gold outperformed its "safe haven" peers such as US Treasuries, Bitcoin and the Swiss franc because of soaring global geopolitical tensions. In the past few years, several categories of safe haven assets have been highly correlated, but in the past two months, this correlation no longer exists.
Yeap Jun Rong, strategist at IG, said: "Gold is likely to continue to outperform other safe havens. Increased central bank purchases and anti-inflationary attributes are also downwind factors for gold's rise. The conflict between Russia and Ukraine has not shown any signs of easing, and further escalation may increase the risk of sustained inflationary pressures, which will continue to push gold prices higher. "
The current conflict between Russia and Ukraine is Europe's worst geopolitical crisis since the second world war, and fears of inflation have intensified as commodity prices rise, redefining "security". Traditional safe-haven currencies such as the Japanese yen and the Swiss franc, which have strengthened during periods of risk, have also performed poorly because of the loose monetary policies of the Bank of Japan and the Swiss Central Bank.
Goldman Sachs believes that the outlook for precious metals such as gold is harder to predict in the short term, but is bullish in the medium term:
On the one hand, if the central bank of Russia restricts the use of its offshore reserves, it will allow Russia to use its huge domestic gold reserves to continue its foreign trade, and the unique role of gold as the ultimate currency may become apparent.
On the other hand, due to the large amount of settlement and the limited number of buyers willing to do so, a large amount of gold needs to be traded at a price below the market price, which will limit its potential to rise. However, the selling of gold reserves by Russia's central bank may be limited because of high energy prices and Russia's reliance on external financing is lower than in 2014.
Gold can be used as an effective hedge against geopolitical risk, but only if geopolitical events are serious enough to affect the US economy. This may be because when tensions arise in other parts of the world, the dollar itself tends to be a safe haven rather than gold. But when the US itself is affected, gold becomes the ultimate hedge. Goldman Sachs believes that the continuing global energy crisis and higher-than-target US inflation mean that any disruption to commodity flows in Russia and Ukraine could raise concerns about further US inflation and a subsequent hard landing, which will be good for gold.
Goldman Sachs concluded that the escalation in Russia and Ukraine, driven by rising energy prices, posed a clear risk of stagflation to the overall economy, giving Goldman more confidence that gold could reach its target of $2150 an ounce within a few months.
In a January report, Goldman Sachs analyst Mikhail Sprogis and others pointed out that it was time to buy defensive assets such as gold. At the time, Goldman Sachs raised its gold price forecast to $2150 from $2000. The reason is that the growth of developed economies, mainly in the US, is slowing and that high inflation will generate investment demand for gold. At the same time, the recovery of emerging market economies will generate consumer demand for gold.
Goldman Sachs was a gold bull last year, but was eventually hit in the face by the market. Goldman Sachs thought gold would rise as high as $2000 an ounce, driven by a weak dollar and demand from emerging markets. But as developed economies grew better than emerging markets last year and expectations of inflation were temporary, gold fundamentals were weak and ended up falling 7 per cent for the whole of 2021.
