How Has the Russia/Ukraine Conflict Affected Gold Prices?

Gold prices are largely on the up and up. By February 18^th, they were at their highest in a year-and-a-half, and a big part of the reason had to do with the tense confrontation on the Ukraine-Russia border, with Russian troops poised to attack at any moment. Traders were drawn to safe havens like gold because of the unknown economic impact of an invasion.

Therefore, even though the US Federal Reserve was planning to raise interest rates, which can often tend to drag on gold demand, gold was soaring. In fact, from the start of February, gold prices were on the up due to “A Rise in Russia risk premium”, in the words of TD Securities.

When traders sense a recession in the air, they will often turn to gold, which is why the precious metal was a good performer during the economic slump of 2020. During the months of the pandemic, demand for gold improved and so did its price. In times of geopolitical crisis too, traders view gold as a safe haven because it is considered less vulnerable to instability than other financial instruments. For all those involved in gold trading as CFDs, let’s take a closer look at gold around the world, from Russian gold reserves to USD and gold prices, to get a better sense of where prices could be heading.

The Slip

On February 24^th, when the invasion finally happened, gold prices took a fall, apparently because “Wall Street was expecting a harder line against Russia, for example by ousting them from the SWIFT international banking network and sanctioning President Putin personally”, explained Ed Maya of OANDA. The price of spot gold was down 1.6% to $1.878.44 an ounce.

The next day, gold slid another 1%, but Commerzbank’s Daniel Briesemann said that “We think the price drop is premature. There is a risk of further escalation in the conflict and it could be just a temporary correction”. Xaio Fu of the Bank of China also saw the ongoing risk in Ukraine and the safe haven appeal of the metal as key factors in gold’s favor, with the caveat that “The upside is limited by the possible rate hike by the US Federal Reserve this March”.

The Recovery

Russian gold reserves have been the fifth largest in the world since Russia overtook China in 2018 when it started buying gold to diversify from its American investments.

On the 27^th of the February 2022, after a two-year break, the Russian central bank announced Russian gold reserves were going to grow fatter again as a measure to maintain stability during tensions over sanctions.

By the 28^th of the month, several nations had increased the sanctions on Russia and the Bank of Russia was prevented from using its foreign reserves to weather their storm. In addition, certain Russian leaders had been cut off from the SWIFT messaging system.

As a result, traders feared global economic growth was under threat and turned to gold, which surged by 2.2%. Gold was the best performer of all the safe havens at $1,899.03 an ounce. Bloomberg added that the metal may “Also get a boost from lower expectations of aggressive monetary tightening by the Fed”.

With the long-term reality of the Ukrainian crisis opening up, “gold prices should have little trouble staying above $1,900, with a strong bias for further strides towards $2,000 if this geopolitical crisis further escalates”, suggested Han Tan of Exinity. Gold had gained as much as 6% in February.

USD and Gold: Peering Through the Smoke

The economic consequences of the terrible conflict unfolding in Ukraine were not 100% clear as March rolled around, even though Han Tan had pointed out the indications of a bullish run for the yellow metal. Real life often stubbornly refuses to conform with analysts’ expectations. Other factors like the US dollar also influence gold prices.

The USD and gold are two instruments intimately linked, since gold is denominated in US dollars. If the dollar gets stronger against other currencies, gold prices in USD tend to drop, the reason being that holders of other currencies can then afford to buy less gold and so demand for the substance drops.

All those engaging in gold trading in the near future should therefore remember to keep in touch with the USD and gold as these weeks tick by, in addition to the news of the conflict in the Ukraine and interest rate news. Trading gold prices as CFDs allows traders to take advantage of price swings in either direction – up or down – which allows them to deal in volatility itself without having to purchase any actual gold, so staying on the forefront of developing news stories is essential to making more informed trading decisions.