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Central Banks, the Power of Gold and the Ukraine-Russia Conflict

A safe haven metal for central banks and individuals alike

Gold is widely regarded as a safe haven metal. In contrast to stocks or bonds that carry counterparty risks, gold is a singular asset with the only influences on its value being the demand, the value of currency and the desire to buy gold as a hedge against inflation and currency devaluation.

Central banks have seen the economic benefits that gold yields for a long time. A testament to this is that they now hold more than 35,000 metric tonnes of the yellow metal, around a fifth of all the gold ever mined. The price of gold is continuing to rise, and the combination of higher energy prices, grain prices and base metal prices has resulted in inflationary pressure and a cost-of-living crisis in the UK that supports the demand and upward trend of the price of gold.

In times of crisis and global uncertainty, investors favour putting their money in a tangible asset rather than opting for stocks and bonds. And not only individuals make the switch from investing in corporations to storing their finances in gold. Central banks do it too. To be clear, a central or reserve bank is an institution in charge of the currency and monetary policy of a state or monetary union, which also oversees their commercial banking system. Unlike a commercial bank, central banks have the power to alter the monetary base by printing more or less money.

Demand for gold amid conflict and human suffering

Amid the Ukraine-Russia war, demand for gold has soared as global markets have responded to the high levels of economic instability surrounding the conflict between these two countries. You can see the current price of gold on our Live Gold Price Chart. Central banks have already been dealing with historic economic turmoil and will now assess how Russia’s invasion may further destabilise markets.

The plight of Ukraine and the level of human suffering is well summarised by the tragedy and destruction that surrounds the city of Mariupol. The situation in this city has been described as the most urgent humanitarian crisis in the world since Russia invaded Ukraine on 24th February 2022. There is virtually nothing left of Mariupol, and hundreds of thousands of residents are said to be trapped inside or underground with constant shelling threatening their lives. This paints a powerful picture of the human suffering and political turmoil driving the price of gold ever higher.

Soaring energy prices: the impact of Putin’s plans

But what is driving the economic uncertainty, and which factors are indirectly causing central banks to buy more gold? In short, the Russia-Ukraine conflict has impacted the UK economy drastically and is also inhibiting the functioning of supply chains for goods that both countries produce. Meanwhile, the UK inflation rate has risen as high as 5.5%, far from the Bank of England’s target of 2%, as the global economy reawakens after two years of Covid disruption.

Gold also has an inverse relationship with the U.S dollar. When the value of the dollar falls, the price of gold typically rises, allowing central banks to protect their reserves during times of market volatility.

Along with several other countries, the UK has imposed bans on Russian oil purchases following the invasion. This has led to a narrowing of available supply at a time when energy prices are already rising dramatically. Several global brands have also pulled out of Russia, causing further economic volatility.

Russia supplies around 40% of the gas used in the European area and is the world’s third largest producer of crude oil after the USA and Saudi Arabia. This will contribute to the high risk of a continuing economic slowdown. Coupled with inflation, this will encourage investment demand for gold from both individuals and central banks. On 7th March, oil prices had risen 9% since the beginning of the month, reaching above £75/barrel for the first time since 2014.

More than just energy - food and metal prices rocket

Russia is also a key producer in other markets, apart from energy, such as food and metal. Both countries involved in the conflict provided almost 30% of global wheat exports, and Russia was responsible for delivering 16% of the world’s fertiliser. This is adding to the upward pressure on food and metal prices, feeding inflation, a rise in the prices of goods and services. In this case, as a result of the increasing cost of commodities.

When the price level goes up, each unit of currency has weaker purchasing power and this is exactly what is happening in global economies.

Gold as a route out of the storm

As a result of the inflationary pressure that has come about, central banks are printing more money to support their economies. This increase in money supply may be necessary to ease economic turmoil, but the negative impact for the UK is the devaluation of the pound. Gold, however, is a finite and tangible commodity whose supply can’t be added to very easily. In a bid to reclaim some of the gold in circulation, The Royal Mint has announced a plan to turn recycled gold into an exchange-traded commodity. Because gold is such a finite commodity, it lends itself as a great hedge against inflation and is a core reason why the demand for gold from central banks is rising. Incidentally, interest rates, the traditional lever of monetary control, have been negligible for over a decade. However, The Bank of England has increased interest rates to 0.75%, bringing it back to the pre-pandemic base rate to tackle rising inflation.

In summary, the inflationary pressure we are experiencing is limiting the ability of traditional stocks and bonds investments to act as a safe-haven asset in portfolios. This may further boost interest in gold as a diversifier. Historically, gold has been the answer during times of global uncertainty, economic instability, and high inflation. And it looks like it’s set to continue this way. One thing is clear. Gold has historically been an effective hedge against market volatility and risks.

Buy gold today: Coins or bullion bars?

If you’re looking to do the same thing as central banks and invest your cash assets in gold, at The Gold Bullion Company we have an extensive range of both gold coins and bullion bars. Gold bars can be a discrete investment which can easily be stored in a secure safe. A key benefit of gold coins is their historical significance, which makes them extremely collectible and the added bonus is that UK gold coins are CGT Free.

Contact us today to discover why investing in gold could help you maintain your wealth.

Article Last Updated: Monday, March 28, 2022