Gold News

Putin vs. the Fed: Who's Impacted the Gold Price More?

1st anniversary of rate rises and invasion...
FRIDAY will mark 12 months since Russia began its latest attempt to invade Ukraine, writes Adrian Ash at BullionVault.
Three weeks later will bring the 1st anniversary of the US Fed starting to raise interest rates.
Seen from our little corner of the world, here in precious metals, who's having the biggest impact so far?
To be clear, the murder and anguish unleashed by Putin continue to dominate global politics. Russia's violence continues to drive inflation higher as well. Or so everyone seems to think.
Pointing to last year's 20% jump in the UK price of bread (plus 29% for butter, 38% for milk, and 40% for olive oil), "One major factor behind high levels of food price inflation is the rising cost of a result of the ongoing Russian invasion of Ukraine," says a report for Parliament in London.
"Another factor leading to food price inflation is the impact of the conflict on food exports from both Russia and Ukraine."
Put another way, "Russia's war on Ukraine could push hundreds of millions into extreme poverty," screams the Daily Mail here in the UK, citing a study of how rising energy costs hit the poorest hardest. Maybe because they have the least money.
Chart of US inflation (red, year-end pace) vs. US Fed interest rates. Source: St.Louis Fed
But as the first draft of history sets like concrete, it's worth remembering that energy costs and headline inflation had already leapt to multi-decade highs for most economies before the Kremlin's sabre-rattling really began last New Year.
Indeed, the Consumer Price Index in world No.1 economy the USA rose 7.2% across 2021 – the worst inflation since 1981 – but slowed to rise by 'only' 6.4% in 2022.
Sure, the surging US Dollar played a big part in that. Summer 2022 saw the greenback hit its most valuable since the turn of the 21st Century on the forex market.
That also played a big part in sending global inflation rates higher again outside the USA across 2022, because the cost of natural gas, crude oil, grain and all the rest didn't fall so much when you have to pay for it in Euros or Yen or (gulp!) the British Pound.
Even so, energy prices are now much lower than they were on that black day when Russian tanks rolled across the border.
So too are most other 'Russian-linked' commodity prices too, most remarkably palladium but also aluminium and copper. Whereas the Moscow stock market has risen, at least in Ruble terms.
Tweet from Nicky Shiels at MKS Pamp
Whatever the truth about Russian supplies of energy commodities reaching the global market despite Western sanctions, you won't see the benefit in your energy bills any time soon.
Filling the tank in your car also now costs about the same as it did 12 months ago (for gasoline if not diesel)...
...pretty much a record high at the time, but sharply below last June's peak, down more than $1 per gallon for US drivers.
Still, as the comment from Nicky Shiels at Swiss refiners MKS Pamp notes above, the absolute cost of raw materials has more than retreated from the shock of Putin's war, sinking back even as that war has dragged on, killing thousands and achieving nothing.
What about the Fed's war on inflation? Sorry, I mean " special operation".
Chart of betting on where Fed rates will end 2023. Source: CME FedWatch tool
It shows how interest-rate traders are betting on where the US Fed will set its key interest rate at Christmas 2023.
Just 1 month ago, more than 86% of such bets saw the Fed ending this year at today's current rate of 4.75% or below.
But that conviction for no hikes...or for a few more hikes and then a big retreat...has now flipped to less than 6%.
And as you can see, the bulk of interest-rate traders now think the Fed will end 2023 with rates at a ceiling of 5.25% or higher.
This time last month, that possibility was given less than a 2% chance.
Hence the big turnaound in gold (and silver) prices from last month's peaks. Because instead of everyone betting that the Fed will "pivot" from raising rates to cutting them, suddenly everyone thinks the Fed will keep hiking.
Y'know, just like the Fed kept saying it would.
The underlying reasons for this pivot on the pivot? Strong jobs data, strong retail sales, stronger-than-expected inflation, and a new consensus that the Fed's rate hikes to date aren't going to crash the economy.
The bond market disagrees, but with the value of Treasury debt sinking by 20% over the last 12 months, who cares about inverted yield curves when Tesla's share price is up 92% from the start of the year?
So sure, keep an eye on Putin (and Biden. And Xi. And all the rest). But also keep watching the Fed. Most especially through the runaround prism of how speculators and pundits think the Fed will act, no matter what it says.
Chart of gold priced in Dollars, last 5 years. Source: BullionVault
Interest rates really do impact gold prices (and silver and the other precious metals), because when you account for inflation, the returns offered to cash in the bank will raise (or lower) the future value of money. And that, alongside stock-market shares, ultimately offers gold's main competition for investors and savers.
As for geopolitical strife, the impact is much less certain.
For every Soviet invasion of Afghanistan (when gold spiked to $850 per ounce at New Year 1980) there is a Russian invasion of Crimea (when gold kept falling in 2014) or a Cuban missile crisis (when freely-traded gold stuck right to its official Dollar-peg of $35 per ounce) or a North Korean missile test fired into the Sea of Japan (see pretty much any of those scary moments leaving gold cold in recent years).
That said, there are lots of geopolitical reasons to buy gold. Last year's strong central-bank demand, for instance, helped put a floor beneath the market as Russia, China and other countries hit by or fearing Western sanctions chose to build their bullion reserves.
Gold also clearly got pushed higher by the shock last February of Russia invading Ukraine, spurring a dash into the 'safe haven' metal as Europe got its first major-power war since 1945.
But it hasn't (so far) proved to be WW3 for the gold market. Here's hoping 2023 doesn't deliver on that either.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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