Gold prices hit $2000 this week as demand has been stoked recently. There have been a number of explanations for what’s driving gold prices, so this article will break down the key drivers for gold and how that impacts gold prices.
How the Russian/Ukraine crisis results in gold price rises.
The Russian/Ukraine crisis has been boosting inflation expectations. Remember, if oil prices are high then that increases inflation expectations. Why? Simply because energy is required for producing and transporting goods. If energy is more expensive then that eventually finds its way into prices. Furthermore, commodities are generally surging higher on the Russian /Ukraine risk, like Wheat, Corn, and Nickel. All of these surges are inflationary. So, point number one to grasp is that inflation is elevated. This, in line with point number 2, is crucial to gold’s gains.
Point number 2 is that safe haven bids are coming into bonds. You can see the safe haven bids that have been pushing 10 year yields lower recently. This is important because it means real yields are pushed lower. High inflation, falling bond yields = falling real yields.
The impact of falling real yields on gold prices
On the chart below we are using a TIPS (Treasury Inflation Protected Security) as a proxy for real yields. This is because they behave in virtual lockstep, but the TIPS is updated during US hours. Real yields are only updated once a day, so it is less useful for trading. The key aspect to notice is that as real yields have been falling (blue line), gold has been rising.
What you need to know about stagflation
If inflation expectations keep rising and growth expectations keep falling then that is the perfect environment for more gains into gold. This is the stagflationary environment. In this situation you can expect the following general reaction in markets
So, if growth keeps slowing, but commodities keep rising, then gold should remain bough on dips until that relationship changes.