Gold’s Surge on War Headlines May Be Fleeting as Past Shows

(Bloomberg) -- Gold's surge on the back of Russia's invasion of Ukraine may be short-lived, if history is anything to go by.

From the Falkland Islands War in 1982 to the Sept. 11 attacks, price spikes in gold resulting from crises that include military action or terrorist strikes tend to be temporary, according to Citigroup Inc. The traditional haven asset jumped as much as 3.4% on Feb. 24 when Russia launched a full-scale attack on its neighbor, but prices have since consolidated, even as other commodities such as oil, wheat and aluminum have accelerated.

While investors have turned to bullion as a store of value and inflation hedge, rising rates present a very real headwind to the non-interest bearing metal.

“Geopolitically-led highs tend to be fleeting; on average, gold prices tend to firm in the immediate aftermath of a risk event and surrender these gains within a month,” said Suki Cooper, an analyst at Standard Chartered Bank. “As 2022 unfolds, we expect gold to revert to taking its cue from real yields.”

In an example of a temporary boost to prices, gold jumped early Friday when Ukrainian officials said Europe's largest nuclear power plant in the eastern part of the country had come under attack from Russian shelling, briefly igniting a fire. Spot prices climbed as much as 0.8%, but pared gains to trade little changed less than two hours later.

Still, geopolitical events that manifest into macroeconomic shocks -- such as the oil embargo in the 1970s, the Latin American sovereign debt crisis in the early 1980s, and the global financial crisis in the late 2000s -- can provide a more sustained bid for gold, said Aakash Doshi, Citigroup's head of commodities research in the Americas.

“To the extent Russia-Ukraine exacerbates commodities inflation, supply chain bottlenecks, and slows global growth -- particularly in Europe -- gold prices are likely to be more supported with higher risk premiums and more dovish central bank reaction,” said Doshi.

Last month, Citigroup raised its short-term bullion forecast and reiterated a 30% bull case probability that prices would hit a fresh record of $2,100 an ounce this year. Prices could drop to about $1,800 if the situation in Ukraine de-escalates, the bank said. Spot gold was little changed at $1,936.58 at 2:45 p.m on Friday in Singapore, up almost 6% in 2022.

Inflows into exchange-traded funds on the back of the war in Europe and the economic fallout may also provide a pillar of support for bullion prices. Holdings in gold-backed ETFs could increase by 600 tons this year if concerns over U.S. growth widen, potentially leading to a price spike to $2,350 an ounce, according to Goldman Sachs Group Inc. Inflows have totaled just above 100 tons so far, data compiled by Bloomberg show.

“Unless longer-term investor interest such as ETF flows follow through, a flight to safety on the back of geopolitical concerns does not usually lead to a structural shift higher in gold amid rising rates,” said StanChart's Cooper. “Gold remains at the mercy of headlines. While there is scope for further price gains, price action is likely to be volatile.”