The volatility that geopolitical risks tend to generate in the markets has led gold to trade at eight-month highs.

The volatility that geopolitical risks tend to generate in the markets has led gold to trade at eight-month highs.

The volatility that geopolitical risks tend to generate in the markets has led gold to trade at eight-month highs.

The remains of the car that exploded this Friday in the vicinity of the headquarters of the Donetsk separatist government.

At a time when the world economy was heading towards recovery after the strong impact caused by the Covid-19 pandemic, the growing tensions between Ukraine and Russia and the possibility of a war between the two countries In recent weeks, volatility and uncertainty have returned to both the markets and the macroeconomic environment.

A scenario that analysts predict will continue for a few more days and that is already having its first consequences. The price of gold accumulates several days on the rise and marks its highest level in eight monthswhile at the same time increasing pressure on prices at a time when inflation is running amok in major economies on energy prices.

Analysts are generally confident that, as in any other geopolitical crisis, common sense will ultimately prevail and The main scenario that they contemplate is that there is no armed confrontation “because it is in nobody’s interest”. This is how the analysts at A&G Banca Privada express themselves, for example, who however admit that the outcome is “absolutely unpredictable”.

Along these lines, Hans-Jörg Naumer, global director of capital markets and thematic analysis at Allianz Global Investors, adds that geopolitics -along with inflation and monetary policy- will continue to be one of the most important issues that investors will take into account. investors when making their decisions. Without needing to go any further, the last week the Ibex 35 had its worst week in three monthssince the outbreak of the omicron variant.

Despite all this, the longer these geopolitical tensions continue, the greater the consequences they will have on both the markets and the economy. “The tensions between Russia and Ukraine could lead to higher inflationary pressure and a slowdown in growth as a result“, remarks Lidia Treiber, director of fixed income analysis at WisdomTree.

Investment rush for gold

As usual every time there is a geopolitical event of the magnitude of the tensions between Russia and Ukraine, investments have once again taken refuge in fixed income -also impacted in recent weeks by the withdrawal of central banks- and the goldwhich has always been described as “an active haven” in times of uncertainty and volatility such as the current one.

Specific, the price of gold has closed higher in twelve of the last 15 trading sessions and is trading around $1,900 after having increased more than 6% in these three weeks. This upward trend has led this precious metal to mark its highest price in eight months. Since June of last year.

Julius Baer analysts explain that this rise is due to this increase in geopolitical tensions around the conflict between Russia and Ukraine, although they consider that this is “a short-term peak”, since historically this type of situation has not caused a lasting increase of gold prices.

Thus, they detail that, as geopolitical risks increase, the price of gold usually rises, and then registers a short-term peak when said risk materializes. This was the case, for example, with the annexation of Crimea. However, if its effect has a lasting impact on the economy or financial markets, things change.

That would be the case, for example, if the West decides to cut off Russian energy imports. In his opinion, this is a “high impact but low probability” scenario, as the economic consequences would be too severenot only for the countries involved, but for the world as a whole due to the links of the energy markets.

“Much more likely, in our opinion, would be a phase of continued heightened tensions despite all diplomatic efforts, characterized by a show of force from both sides,” it adds. For this reason, he points out that, although short-term risks point to upward prices for gold while tensions last, do not foresee changes in the medium and long term in their forecasts.

However, in statements to The Wall Street Journal, Matt Miskin, one of the heads of investment strategy at John Hancock Investment Management, says that “the stars are aligning” for a refuge in gold and points out that An increase in geopolitical tensions could take gold to record levels since 2011, marked in August 2020, in a few monthswhen it hit $2,050.

Along these lines, Bank of America analysts also recommended in a recent report that investors should consider increasing their gold purchases if prices exceeded the range of between 1,860 and 1,880 dollars, as has happened. And, in addition, they pointed to the probability that there will be new rises from there.

price increases

Another of the economic consequences that are deriving from the conflict between Ukraine and Russia is the impact it is having on inflation. And it is that the energy dependence that part of Europe has on Russian gas has generated concern in the markets and has caused a new rise in oil and gas prices.

This, in turn, has given a new impetus to the inflationary pressures that have been building up in developed countries for some time. “Persistent inflationary pressures linked to supply chain problems have been exacerbated due to the tensions surrounding the Russia-Ukraine“, emphasizes the director of fixed income analysis at WisdomTree.

Mabrouk Chetouane, head of global market strategy at Natixis IM Solutions, points out that the The increase in energy prices in the last twelve months and their current level are beginning to worry investors. In fact, he points out that, although it produces some kind of “de-escalation” on the Russian front-ukrainianprices are likely to hold for some time.

“Especially considering the following factors: first, global growth should remain strong this year; second, political risks are still present; and third, the low inventories together with the weakness of investments in the energy sector”, he details.

Nevertheless, energy prices are not the only ones that have been affected in recent weeks due to the conflict between Ukraine and Russia. Another example is that of wheat, which has become more expensive by about 10% since the conflict revived. Both countries are among the main producers of this cereal worldwide and their confrontation does nothing more than pay for the galloping rise in prices that they had been accumulating since the outbreak of the pandemic.

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