The recent news of the Russia / Ukraine war has seen the U.S Dollar decline however; gold is not nearly as valuable as everyone had expected it to be. Here are two factors that affect the economy and gold.
Let’s look at the USD index. The index has broken away from previous highs. The index had a short time to correct itself. The correction mirrors what happened in 2002 and 2003. At that time, the correction took a while to happen before there was any movement. It might not be the case now because of the dramatic increase in interest rates. If the USD Index moves further towards the 104/5 region the medium-term outlook is likely to remain critical.
In the short them, the index has dropped seriously over the last couple of days and weeks. This could be taken as an indication that gold as a commodity may be declining. Investing in gold is still a good idea because of its safe-haven identity. It has not stopped being that especially with the conflict between Russian and Ukraine. A drop in gold might be taken as an indication that war may be coming to an end and that Russia has not gotten what it wanted to get after all.
While the USD index fells by as much as 1,2% on some days, gold stocks only managed to rise by as much as 0.38%. Silver price also happen to be growing which means that in the near future, silver might give gold a run for its money. Still looking at the second factor that has an impact on the gold price – gold stock one has to take into account the strength of the predominant currencies.
We are in a unique situation where gold does not have to rally to have an upper hand on the USD. This means that the gold market is more bearish especially since support for the USD index seems to be around the corner. If the situation between Russia and Ukraine stabilizes and things to return to the way they were that would mean correcting a lot of the things that have gone wrong in the past. We have been here with Russia when it invaded Crimea and what we might have learnt then was that there was an upward movement of the gold price followed by a sharp decline. One could say the rise that came at the beginning of the Russia/Ukraine war, will have reduced the amount of gold that Russia had because of the need to find an alternative way of trading. So, the price oscillated between $1,600 and $1,800. The price drop was inevitable however, in mid-September the gold price went up again. This upward move simply meant that gold stocks were self-correcting and checking the extent of the damage these political tensions have caused and are still causing). The problem with gold stocks right now is that they are in a medium-term decline. Physical gold itself continues to correct from its past decline.
The bottom line when it comes to gold price movements are that both factors: stocks and actual gold prices have been in this situation before and according to pundits, nothing that is happening now has broken with history.
This article was written by Melbourne Gold Company.