Sanctions and Inflation Support Higher Gold Prices

Gold opened Monday morning in Australia with a lackluster move that took prices lower. Basis, the most active June 2022 contract gold futures, opened this morning at $1927.10 and traded to a low today of $1918.20. The metal then recovered, trading to a high of $1936, and as of 2:50 P.M, EDT is currently trading just off of today’s intraday high and fixed at $1935.60, a net gain of $11.80, or 0.61%.

The bearish faction is focusing on the fact that inflation is at the highest point it has been for the last 40 years, which will most likely lead to a much more aggressive stance by the Federal Reserve when they conclude their FOMC meeting on May 4. Fed members have already announced that they will raise interest rates at each of the remaining six FOMC meetings this year.

Another major factor is the invasion of Russia into Ukraine and the destruction and devastation through their military actions, which have been reported to be targeting not only the military but also civilians. Millions of Ukrainians have fled the country to find shelter in the safety of NATO countries on their border.

The Federal Reserve’s new aggressive monetary policy

However, the unknown factor is whether those rate hikes will be as anticipated, which is ¼%, or a more aggressive stance raising interest rates by ½% during more than one of the remaining FOMC meetings. As we spoke about last week, studies created by the Federal Reserve Bank of Cleveland are suggesting that inflation is about to advance even more.

On March 31, inflationary numbers were released for February which indicated another uptick in the current level of inflation. However, the study by Cleveland’s Federal Reserve Bank indicates that inflationary pressures came in at 8.41% in March year over year, and their forecast for Q1 is that inflation will run as high as 9.1%.

While inflation intrinsically moves gold higher, in this particular instance, because inflation is spiraling so quickly, it is almost certainly going to reflect a much more aggressive monetary policy for the remainder of the year and possibly longer if inflation does not begin to diminish.

On The Russian Front

Although Russia pretends that it is currently negotiating a resolution to the conflict in Ukraine, the truth of the matter is that even during periods of negotiations when both sides of the conflict are actively looking for a compromise that would end the crisis, Russia continues its military action throughout the peace talks. Typically, when countries are negotiating a peaceful resolution, it occurs simultaneously with a cease-fire or truce.

In the case of the current negotiations, I believe that Russia is simply using that time to resupply its military and continue its brutal campaign of leveling city after city. Both have lines in the sand, and sadly they are so far apart that it seems impossible for a peaceful resolution. Russia is demanding that the Ukrainian military lay down its arms in unison with a surrender of Ukraine. Ukraine is adamant about protecting its sovereign country and seems extremely unlikely that it will choose to surrender to Russia.

Based on these differences, I fear that it will get much worse before it gets better. I also fear the same for inflation. Inflation will get much higher before it begins to diminish. If those two assumptions are correct, gold will benefit from the geopolitical uncertainty and tension in Eastern Europe as well as exceedingly high levels of inflation globally.

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Wishing you as always good trading,

Gary S. Wagner