Will Gold Price Hit USD 2,150 On Russian Invasion?

Gold prices are back above USD 1900, gold trades at around USD 1910, but a return back to all-time highs requires greater escalation between Russia and the West.

This remains the case that more upside is possible as the Russia-Ukraine crisis unfolds, but its likely that the 2022 high has been established. According to the IG Client Sentiment Index, gold prices retain a bearish bias in the near-term.

So, further upside is still likely, but it stands to reason that gold prices have already carved out their apex. Gold prices have since rebounded from last week’s low below 1880 to trade around 1910.

The aggressive sanctions against Russia by the European Union and the United States have ratcheted tensions higher as Russia presses forward with its invasion of Ukraine. The core thesis remains: it’s World War 3 if gold prices are going to have any chance at a return to their highs set last week.

Historically, gold prices have a relationship with volatility unlike other asset classes. While other asset classes like bonds and stocks don’t like increased volatility, signaling greater uncertainty around cash flows, dividends, coupon payments, etc.

Gold tends to benefit during periods of higher volatility. The ongoing war in Eastern Europe has continued to push gold volatility, translating into higher gold prices. As the Western nations accelerate sanctions against Russia in the aftermath of the invasion of Ukraine, Goldman Sachs raised its commodities price forecasts, citing supply disruptions and an even more problematic inflation outlook.

The commodities to pay close attention to are the ones Russia is a major producer of oil, gas, aluminum, palladium, nickel, wheat and corn.

“The range of near-term price outcomes for commodities has become extreme, given the concern of further military escalation, energy sanctions or potential for a cease-fire,” Goldman said in a note to clients on Sunday. “We expect the price of consumed commodities that Russia is a key producer of to rally from here.”

Gold is another safe-haven commodity that is due for a much bigger rally going forward, according to Goldman.

“The recent escalation with Russia create clear stagflationary risks to the broader economy, driven by higher energy prices, which reinforce our conviction in higher gold prices in coming months and our USD 2,150 per ounce price target,” Goldman said.

In reaction to additional sanctions against Russia, gold surged above USD 1,916 an ounce on Monday. Some gains were lost as the trading session progressed, with April Comex gold last at USD 1,905.70. But the precious metal is still set for the best monthly performance since May.

Goldman explained that gold would play a central role in this conflict as Russia turns to the precious metal for leverage amid sanctions. Russia’s gold reserves total 2,298.53 tonnes, according to World Gold Council.

“Gold’s unique role as the currency of last resort will likely be apparent if restrictions on Russia’s central bank accessing its offshore reserves leave it leveraging its large domestic gold stockpiles to continue foreign trade, most likely with China,” the bank said.

According to analysts, gold price could hit USD 2,000 within a matter of days. Also, Goldman increased its one-month Brent crude oil price projection to USD 115 a barrel from USD 95, adding that Russia is becoming more isolated as the West’s sanctions kick in. “[For Brent, there is] significant upside risks on further escalation or longer disruption,” the note added.

During the US trading session, Brent is trading above USD 100 per barrel and the US West Texas Intermediate (WTI) is at around USD 96.

From the macro perspective, Goldman raised its inflation outlook, stating that it is “increasingly concerned” about the pace of inflation in 2022. “A very high inflation path in 2022 should make an easy case for steady rate hikes at all seven remaining” Federal Reserve meetings in 2022, said Goldman economist David Mericle said in another note to clients.

The bank expects core inflation to run at 3.7% through the end of this year. Its previous estimate was at 3.1%. In light of this, Goldman is estimating to see seven rate hikes in 2022 and another four in 2023.

The first rate hike will likely come on March 16, with the CME Fed WatchTool projecting a 92.5% chance of a 25-basis-point hike.