Gold within sight of US$2,035 record amid looming war in Ukraine while market’s ‘fear gauge’ jumps

Gold prices are likely to test the record set in 2020 as heightened geopolitical tensions over a Ukraine invasion, runaway global inflation and stock market volatility fanned demand for safe haven assets, according to State Street Global Advisors (SSGA).

The US, which described Russia’s move as a prelude to an invasion of Ukraine, has responded with several sanctions with its allies. US stocks entered a correction phase this week, as the S&P 500 Index slipped more than 10 per cent from its peak in January while a measure of market volatility rose to near a record.

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The S&P 500 lost 33.8 per cent during the depth of the Covid-19 pandemic in February-March 2020, while gold weakened 3.6 per cent, according to data from SSGA and Bloomberg.

Robin Tsui Chi-kit, Asia-Pacific gold strategist at SSGA Hong Kong. Photo: Handut alt=Robin Tsui Chi-kit, Asia-Pacific gold strategist at SSGA Hong Kong. Photo: Handut>

The VIX Index, which measures S&P500’s expected volatility and is also known as the “fear gauge”, stood at 31.02 on Wednesday, near the record 32 in late January. The five-year average is about 19.

Ongoing risk aversion has prompted investors to rush back into global exchange traded funds (ETFs) that track gold prices, resulting in US$2.7 billion of inflows in January, according to the World Gold Council. Total assets grew 6 per cent to US$221.8 billion. They suffered US$9 billion of outflows in 2021.

SPDR Gold Shares, the largest of the ETFs, has risen 4.3 per cent this year, outperforming the Hang Seng Index and S&P 500.

While the going is great, gold investors face potential headwinds in the form of an aggressive interest rate tightening in the US to quell inflation, according to Warren Patterson, head of commodities strategy at ING based in Singapore.

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The Federal Reserve has signalled a rate increase starting from March, with the market pricing in as many as seven increases through 2023. US inflation accelerated 7.5 per cent in January, the fastest pace in four decades.

“The strong inflationary environment is putting increasing pressure on the Fed to be more aggressive when it comes to rate hikes,” said Patterson. Sticky inflation would entrench rate-hike expectations which “would not be supportive for gold prices,” he added.

Improving real yields could weaken the allure of gold, which does not earn interest. Patterson expects gold to retrace to US$1,700 per ounce by the end of 2022, driven by more hawkish Fed policy and a de-escalation of Ukraine-Russia tensions.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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