The price of gold reached a record high this week.
And if you listen to the mainstream financial news, you might think the Russia-Ukraine war has everything to do with gold’s record prices.
The Wall Street Journal: “Russia-Ukraine Tensions Power Gold to Eight-Month Highs”
CNBC: “Gold Rises Amid Russia-Ukraine Crisis”
Bloomberg: “Gold Rises Above $2,000 as War in Ukraine Boosts Haven Demand”
There’s just one thing about all these headlines: They’re all wrong.
The Russia-Ukraine conflict actually has very little to do with rising gold prices.
Now, please note, the Russia-Ukraine war is, in fact, driving the prices of other metals screaming higher. Nickel prices nearly quadrupled in price on Tuesday to $100,000 per ton before the LME suspended trading. Meanwhile, palladium prices touched an all-time high this week of $3,425 an ounce. The Russia-Ukraine war is sending prices for these metals higher. But the war is not what’s mainly driving gold.
The U.S. government and Federal Reserve WANT you to believe Russia’s invasion of Ukraine is “powering” gold prices higher. And it is to some extent. There’s no doubt the war has fueled some demand for gold.
But the price of gold would be increasingwithout the Russian invasion.
In fact, if anything, the Russian war is actually holding back gold prices.
I know that might sound a bit counterintuitive to a lot of people. The general perception is that gold benefits during times of significant geopolitical crisis.
But that’s not really the case — or at least that has not been the case for the past two decades.
Geopolitical crisis has not really been a significant driver for gold prices since 9/11.
There have been multiple times of significant geopolitical crisis in the past two decades that gold has all but ignored.
In fact, one of those times was in February 2014 when Russia invaded Ukraine. February 2014 saw a brief increase in gold prices, but that was followed by months of downtrend.
Gold Prices — 2014
In the past two decades since 9/11 we’ve seen wars and armed conflicts in Iraq, Afghanistan, Pakistan, Syria, Somalia, Lebanon, Libya, Israel, Mali, Nigeria, Turkey, etc… None of these have been significant drivers of gold prices.
Why should Russia’s invasion of Ukraine (this time) matter for gold?
It doesn’t.
And there’s a very good reason for that: The majority of today’s investors don’t hedge geopolitical crises with gold.
Investors today hedge geopolitical crises with the U.S. dollar. This hedging creates demand for the greenback and increases its value. And that increase to the U.S. dollar value generally affects the price of gold to the downside.
This has again been the case with the Russia-Ukraine war.
Since the beginning of the recent Russian invasion, demand for the U.S. dollar has increased. This is reflected in a more than 3% rise in the U.S. Dollar Index since the Russian-Ukraine conflict began.
U.S. Dollar Index — Four Months
Gold, oil, and the U.S. dollar are all increasing in value at the same time. If investors weren’t buying the U.S. dollar right now to hedge the Russian conflict, the price of gold would be much stronger. That’s why I say the Russian war is actually holding back gold prices, not contributing to them.
So if the Russia-Ukraine conflict isn’t the main contributor to rising gold prices, what is?
Well, simply put: inflation.
As I mentioned, I believe the U.S. government and Federal Reserve WANT you to think Russia’s invasion of Ukraine is driving gold (and oil) prices higher.
That’s because, sooner or later, the Russia-Ukraine war will end. And if they can convince people that the war is pushing commodities higher, they can convince them later that the end of the war should mean a return to more normal levels.
It’s a classic straw-man strategy.
And the U.S. government and Federal Reserve need a straw man to shield themselves from this…
U.S. Dollar Supply — Five Years
… The more than $6.2 trillion the U.S. printed in the past two years.
40% of all U.S. dollars that exist right now was created in the past 24 months.
That massive influx of fresh cash IS what’s driving gold (and to some extent oil) higher right now.
But that’s a problem that won’t end.
The Russia-Ukraine war, on the other hand, is the straw man that will end.
You can’t rely on the government to have your personal interests in mind. You can’t even rely on it for even the slightest unbiased information. And like Energy and Capital editor Sean McClosky said the other day, “If you’re not actively looking to protect your own wealth, no one is.”
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