Key Points

·       Since Russia’s invasion of Ukraine, global equities have been sold-off as investors seek safe haven assets.

·       The price of gold is up 9% so far this year, its miners over 19%

·       When governments take up arms the price of the yellow metal usually rises, this time heavy artillery attacks close to nuclear power plants also do not help.

·       Markets are in turmoil and Gold Mining ETFs could continue to rise as the Russia/Ukraine war escalates and the economic impact of suddenly excluding one of the largest commodity and producers plays out.

·       Prior to Russia’s military actions many economies were battling inflation and with that poised to get worse all eyes will be on the Fed this week as the prospect of the financial system returning to ‘normal’ seems further distant while risks around liquidity and rate rises exist. This is likely to benefit the gold price.

·       If inflation remains elevated for several years, the financial system will not be able to return to normal for an extended period. This could create a favourable environment for gold and for gold stocks to shine.

·       The Australian research community has reinforced their conviction in gold strategy with favourable ratings on gold miner index ETFs in 2022.

Gold remains on a tear so far in 2022

Prior to Russia invasion, Gold and its miners had been among the best performing assets so far in 2022.

That performance has continued following the invasion as investors seek safe haven assets. On the 7th March, the gold price shot above US$2,000 for the first time since August 2020 after the US said it might ban Russian oil exports, which would put upward pressure on already high inflation and potentially slow economic growth.

In addition, Russia is a major producer of gold, so its expulsion from global economic trade is expected to reduce the supply of the precious metal.

Accordingly, the fears of supply shortages due to the Russian-Ukrainian conflict along with strong demand has driven gold prices higher.

A beneficiary of the rise of the gold price has been its miners.

Historically, geopolitical turmoil has been a short-term driver of gold prices. Geopolitical drivers rarely last in the longer term for gold as the world adjusts to new realities. However, the Ukraine war is having a greater impact on the global economy and financial system than any regional conflict in recent memory. Gold is now consolidating its break-out gains above the $2,000 level.

After 18 months of lacklustre trading, and apart from the Ukraine drivers, it looks like sentiment is improving for gold for several reasons:

· Technically, gold has seen a half-dozen breakout attempts that have failed since it reached its $2,075 high in 2020. Finally, a confirmed break-out and a more positive chart trend is in view.

· Investors were questioning gold’s efficacy as its price struggled amid rising inflation. The recent price moves leave no doubt that gold is performing as a safe haven.

· We believe its role as an inflation hedge will also emerge if inflation persists in 2022.

Inflation looks entrenched

Historically, interest rates roughly follow the trend of the CPI. However recent yields have not moved in tandem with inflation. Such a relationship has not lasted historically. The Treasury market continues to believe inflation will come down. On the other hand, Treasury rates may rise to match inflation with a long lag.

The return to ‘normal’ on hold?

With quantitative easing (QE) ending, it was also predicted that the Fed would begin raising rates, it now finds itself in a precarious situation of also having to manage the unintended consequences of sanctions on one of the world largest commodity producers. All eyes will be on the Fed this week and its accompanying statement.

If the Fed is compelled to end hawkish stance to save the economy, inflation could remain elevated. In addition, unlike past demand-driven inflation cycles, driving this one is, in large part, supply chain issues. Tight policies bring down inflation by reducing demand. However, the Fed has no tools to address supply problems, nor can it counter commodity and other price pressures brought on by the war.

A prolonged war could push the global economy into a stagflation and that is also supportive of gold.

Gold stocks provide leverage to bullion

Gold equities tend to outperform gold bullion when the price rises, and underperform if the gold price falls. Although this expected relative performance may not hold during certain periods, gold equities have consistently demonstrated their effectiveness as leverage plays over the years.

As investors become more confident that the current low multiples are not merely ‘value traps’, given their improved earnings and fundamentals, gold miners could benefit from an upward re-rating as capital flows towards value shares such as commodity-related stocks.

Accessing gold miners on ASX

If you are interested in learning more about exposure to gold in 2022, Humble Goode Financial has access to investment grade exchange traded funds and can provide you expert advice on exposure to gold in your super or investment portfolio.

We can access both hedged and unhedged exposure to the market, to allow us to hedge against falls or rises in the USD/AUD exchange rates.

Why not give us a call to learn more.