Gold, Inflation and Geopolitical Tensions

Many investors see gold as a sort of haven in times of turmoil, and prices have surged amid Russia’s invasion of Ukraine. Franklin Equity Group Portfolio Manager Steve Land outlines how his team approaches investing in the metals sector, and why smaller gold producers in particular look appealing.

Gold bullion—typically seen by many investors as a haven in times of international tensions—climbed above US$2,000 per troy ounce in March as investors sought hedges from inflation and political turmoil. On March 8, gold futures settled just above US$2,043 an ounce, not far from US$2,069 an ounce, the highest end-of-day price based on records dating back to January 1975.1 Gold has outperformed other perceived haven assets in February and March, including US Treasuries (as heightened inflation diminished the appeal of bonds), the Japanese yen and the Swiss franc.2

Western sanctions on Russia also prompted a pledge from the Russian Central Bank (RCB) to resume purchases of the precious metal that have been on pause for nearly two years. The RCB has historically purchased the gold produced in Russia as a way to add to government reserves, but it may see a benefit in shoring up existing supplies since gold is an asset not tied to any one country or financial system. Sanctions have also made it difficult for gold producers operating in Russia to sell their production globally, leaving the Russian government as a key buyer in order to keep those operations running.

Rising global inflation has been another factor supporting gold this year; in particular, US consumer prices have witnessed an accelerating uptrend in early 2022, sending the annual inflation rate to a four-decade high. Gold coin and bar demand has been strong over the last couple of years, which only seems to have been boosted by recent geopolitical events, as premiums above spot prices have increased in several markets, reflecting a shortage of available physical supply relative to the demand.

Three Key Value Creation Activities

Gold has been performing well, but we still see a number of potential drivers that could move the metal even higher. In our view, gold may benefit from additional bouts of elevated market volatility and lingering concerns over the coronavirus’s economic impact. The Russia-Ukraine war has added further uncertainty to the global economy. A classic feature of gold is its very low correlation with other asset classes, supporting increased interest in owning it as a portfolio diversification tool in volatile markets.3