While central banks are still the dominant underlying theme, traders are having to contend with uncertainty over the geopolitical situation, something that is tough to quantify. In this environment, gold has enjoyed solid gains as its role as the traditional safe-haven asset.
One thing that enthrals market followers, be they economists, analysts, investors, traders or speculators, is the simple day-to-day challenge of predicting and evaluating macro and micro news that affects price and risk.
After all, those taking responsibility for holding positions in financial markets are effectively “risk” managers. And these market participants can at least try to predict the outcome of central bank decisions by constructing models based on precedent, economic data and commentary from officials.
But the outcome of geopolitical events is not in any playbook, even if history shows which eventualities may result.
So, the outcome of Russia's stand-off, like any other geopolitical incident, is the kind of so-called “tail risk” that cannot be accurately modelled and may have huge consequences for the global economy.
This means outcomes are uncertain with volatility elevated — and this is generally the worst that can beset a market.
For example, volatility in the US government bond market, generally known as “the bedrock of the global financial system”, is close to its highest level since the peak of the market instability during the coronavirus crisis.
The concerns about monetary policy tightening among central banks to rein-in rampant inflation have added to the mix.
This environment of stubbornly high price pressures has recently started to benefit the gold price, highlighting the commodity’s status as a hedge against surging inflation.
While rising bets for more interest rate rises kept a lid on any meaningful upside for the non-yielding precious metal in early January, the crisis in Ukraine has provided the impetus for an advance to the psychological $1,900 price level.
Gold spot prices have broken above $1,900 in recent sessions, but it has yet to register a daily close above it — at least for now.
One interesting factor to take notice of is gold’s relationship with “real” interest rates, which are adjusted for inflation. Historically, “real” rates are inversely correlated with gold, which means that when they are rising, the price of the precious metal will fall.
This is because higher interest rates make non-interest bearing assets such as gold less appealing. In effect, they would raise the opportunity cost of holding non-yielding bullion. But this has not been the case this year. While “real” rates have risen, gold prices have remained resilient.
This may be down to increasing growth concerns in the US as the Federal Reserve is forced to act to tame inflation.
Several Wall Street analysts are whispering that we could see a policy mistake from the Fed and other central banks.
While we will not know if any coming decision will lead the US economy into recession for some time, investors like the certainty of holding gold in their portfolios if this does come to pass.
Gold has a long and relatively stable history in investment portfolios. It has been promoted as a safeguard against diminished purchasing power of fiat currencies such as the dollar.
It also has a long record of helping to cushion investors from unforeseen shocks as a store of value in times of stress. We need look no further than 2020, when it paid to have an investment in bullion as markets struggled to absorb the economic fallout from the coronavirus pandemic.
The short performance history and price volatility of alternative asset classes like cryptocurrencies, which have been dubbed “digital gold”, simply highlight the relative attractiveness of the physical, shiny metal in times of crisis.
Hussein Sayed is the chief market strategist at Exinity