A turbulent start to the year has resulted in a boost to physical assets, particularly precious metals, with gold prices surging past $2000 to now reach $2,013 (£1,537) an ounce. Investors are increasing their net long positions on gold for the fourth consecutive week as the war in Ukraine generates commodity market turmoil. In fact, some analysts expect gold prices to soon beat the record high of $2,089 reached back in August 2020.
Sale of Russian bars suspended
In response to sanctions imposed on Russia by the UK, U.S., and EU, the London Bullion Market Association has suspended transactions with all six Russian gold and silver refineries (meaning freshly-minted bars will no longer be accepted). Since Russia is one of the main producers of gold, the limited supply is giving gold a boost. On top of growing geopolitical uncertainty, inflation has also steadily been driving demand for gold as a superior store of value. Inflation (despite previously expected to generally decline in the west) is set to remain higher for longer due to supply chain disruptions caused by the Russia-Ukraine conflict. Rising gold prices are in turn increasing demand by providing “retail customers with re-assurance it’s a reliable safe haven”, comments Dan Fisher, CEO of Physical Gold. He also notes the Royal Mint is falling behind demand, resulting in a delivery delay for select new coins. Indeed, gold’s enduring value renders it a safe haven for investors during volatile times. Additionally, gold is also considered an effective hedge against inflation since gold prices tend to keep pace with the rising cost of living.
Palladium market
In addition to gold, other precious metals are also being affected as investors reassess demand and availability. For example, copper, a key component in the global manufacturing industry, recently reached a record of $5.03 per pound. Additionally, palladium prices are also soaring to record highs ($3,442 an ounce) due to concerns over supply chain disruptions (in fact, palladium prices still rose despite a recent Goldman Sachs report suggesting palladium shipments from Russia will likely not be disrupted). “The best example of how the crisis might spark another supply chain crunch is in the palladium market, where Russia’s share of the global production is just over 45%”, explains Joe Brusuelas, chief economist at RSM. “Palladium is used to produce the advanced microchips used in vehicle production, so this will impact manufacturing firms (especially in the motor vehicle sector). But all middle market businesses should be prepared to scour their downstream supply chains for areas that may be vulnerable to supply disruptions from Russia”.
“It seems the meme stock frenzy has now metamorphosed into commodity chaos, as traders have scrambled to try and cover short positions”, comments Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “Those that had bet against the metal’s rise in value, have now been forced to buy at a much higher price, creating a short squeeze”.
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