Escalation of the Russia-Ukraine conflict leads to high demand for gold

by David Fleschen

The gold price jumped up to USD 1,930 per troy ounce at the start of trading. However, it later retreated and fell back below the USD 1,900 mark. Other commodity prices such as those of palladium, aluminium, oil, natural gas and wheat are also reacting strongly. The USA and the EU have imposed further - this time tougher - sanctions against Russia. Thus, in addition to the exclusion of some commercial banks from the SWIFT payment system, the Russian Central Bank is now also directly affected by the sanctions. Russia's President Putin has threatened the West with deterrent weapons and put the country's nuclear forces on alert. And last but not least, fighting continues in Ukraine.

All this is a cause for concern and leads to corresponding price movements on the markets. Gold is in demand as a safe haven in this environment, which can also be seen in ETF inflows. Last week, the holdings of gold ETFs tracked by Bloomberg were increased by 9 tonnes. This was the sixth consecutive week of inflows (a total of 73 tonnes over the period). In addition to ETF investors, speculative financial investors also continued to be active: according to CFTC statistics, they expanded their net long positions in gold by almost 30% to nearly 140 thousand contracts in the week ending 22 February. This was the third consecutive weekly increase. In our view, speculative financial investors have therefore added to gold's price rise. Instead of selling gold to support the economy - which would probably have been difficult to do anyway given the new sanctions - the Russian central bank has announced that it will buy gold again on the domestic market in the future. It had ended a long-standing purchase programme about two years ago. According to data from the World Gold Council, the Russian central bank currently holds around 2,300 tonnes of gold.

Source: Commerzbank Research, Photo: Fotolia

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