InvestorQ : Why are gold and crude oil rallying so hard amidst the Ukrainian crisis?
shrinidhi Rajan made post

Why are gold and crude oil rallying so hard amidst the Ukrainian crisis?

1 year ago

Let me talk about good old gold first. It is said that any crisis is a boon for gold as it is normally considered a safe haven the most when there is a crisis. Gold has traditionally held value through some of the worst crises in history. Gold has rallied from $1,796/oz in the start of the year to $1,920/oz in less than 2 months, a healthy return of 6.9% in a short span of time, largely due to the uncertainty created by the Ukrainian crisis.

In the last few weeks, gold and crude have done very well for a different set of reasons altogether. Oil is at a 7-year high while gold is at a 14-month high in the market. Gold had given negative returns of -3.5% in year 2021 as risk-on investing was in vogue. The big story has been crude oil which rallied more than 30% since the start of the year. The global oil market was undersupplied and the Ukrainian crisis threatens to worsen the situation.

On 24-Feb, crude touched a high of $105/bbl before retreating below $100/bbl. However, oil has again crossed the $101 mark on 25-Feb indicating that the pressure may still be on. Oil had last peaked in September 2014 before the glut of shale from the US and Canada pushed down prices and in 2020 amidst the COVID crisis, the oil prices almost got close to zero in Brent and went into negative. Since then the OPEC + Russia combination worked.

The Ukrainian crisis gave a major boost to oil prices, largely because Russia is the second largest producer of oil in the world and a key supplier to EU region. If the war disrupts supplies to EU, price of oil and gas are likely to go up sharply, pushing the whole world into trouble. It is in anticipation of this shortage that oil futures have started rising so sharply. For now, it looks like the demand supply gap in crude oil is going to stay on for some time.

Finally, let me come back to a word of caution on gold. There is one factor that can work against gold. Bond yields are too high globally and at these rates, opportunity cost of investing in gold is fairly steep. Gold was a smart asset in 2020 when the pandemic had led to near-zero interest levels. Now bond yields have risen sharply and the Fed is all poised for series of rate hikes planned in 2022. Gold upsides, as a result, may be restricted.