Ukraine Fights as Gold Flies

Author: Aaron Jun Kit Wu, Graphics: Caroline Yee

The BRB Bottomline

The gold industry is an underrecognized market that historically has had high potential in maintaining steady growth for investors. However, a recent turn of events has led to volatility in the gold market. This article explains how investors can continue to turn a profit by committing to either short and long-term gold investments.

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Ripple effects of the current full-scale conflict between Russia and Ukraine have permeated the world during the early months of 2022, resulting in key ramifications for the global economy. As soon as Russian forces broke through the Ukrainian border on March 4th, the global stock market suffered a significant drop. Moreover, the current war in Ukraine has undone nearly all of the progress made to bounce back from COVID-19 in the economies that were hit hardest by the pandemic. The S&P 500 witnessed a drop of 13.05%, the largest drop since May 2020. Additionally, the index noted a correction for the first time in over a year, meaning that there was an overall decline of over 10% from the level at which it once was. Since the beginning of rising conflicts between the two countries in late February, countless investors have liquidated their assets and holdings, anticipating another drop. However, while various elements of the stock market as well as other securities witnessed a piercing decline, one industry stood apart as a beacon of stability: the gold industry.

Golden Glory

Russia undoubtedly predicted that their conflict would lead to a global bear market, as evidenced by  their decision to convert a significant amount of their assets to gold. Their rationale was due to the fact that gold is an internationally recognized form of currency that is characterized by its long-term stability and resistance to small changes in the market. The value of gold is maintained through the collective power of investors across the world believing in its inherent value as a rare and precious commodity. As gold is not a government currency, its value is perceived equally across the world.

The reason for such a spike in gold prices boils down to one fundamental reason: fear of a supply shortage. Russia is a world-renowned gold producer — ranked the 3rd largest producer of gold in 2021. Due to recent sanctions against conducting trade in Russia, many investors predicted an inevitable supply shortage of gold. Furthermore, changes in gold demand partially stem from a global trend of liquidating assets and converting them into gold, which would in turn devalue currency. This creates a positive feedback loop, which drives investors to convert even more of their currency into gold. 

The gold market logged a four percent increase in a week and was predicted to reach $2000 per ounce in the international market, breaking past what used to be an invisible barrier preventing it from rising above $1959.40 per ounce. These events are all expected to take place even in spite of the FED’s increase in their interest rate, which is intended to incentivize people to hold more currency.

What Should Investors Consider?

So, what does this mean for potential investors? On the surface, the obvious choice appears to be to dive straight into the gold industry. However, the situation is more nuanced than that — potential investors in gold should specifically execute one of two strategies, each with their own direction. The first option is to treat gold as a short-term holding — a way to make a quick profit. Short-term investment in gold could potentially yield an increase in asset value as the gold industry is rising at a steady rate. As Russia is a large producer of gold, sanctions against trade with Russia would drastically increase its value. This trend would hold steady as long as the conflict is still in full swing.

However, despite the seemingly endless increase of gold prices in the coming months, a dip could be right around the corner. Why?

The unknown end of the war. When the war eventually concludes, investors will liquidate their assets in gold to invest back into the stock market. This is due to the fact that many of the reasons why investors initially pivoted to gold as an alternative means of investment — namely, its reliability as an investment with stable growth — will no longer be applicable. When the stock market inevitably returns to its initial point prior to the war, investors will have a significantly better chance of generating profits, both in the short and long term, on international stock markets than in the gold markets. Thus, the supply of gold would drastically increase and the value would decrease. However, in the long term, the value of gold will be able to stabilize as it will continue to maintain its value through the holdings of individuals across the globe. Long-term investment in gold, tried and true throughout history, will lead to a steady increase in value. 

Conclusion

The presence of an international crisis or any form of conflict has historically led individuals to flock towards gold as a means of alternative investment. With the current gold market affected by the Ukraine/Russia conflict, investors can profit through either closely calculated short term or extended long term investment. As the conflict has not subdued, gold is still in shortage, and so the value of it has been on a rise. However, as soon as the conflict subsides, investors will liquidate their gold assets to return to traditional investments, causing a sudden surge in gold supply, thus decreasing its value. However, as historical evidence suggests, gold will still be able to resurface its value, as it always has — opening doors for potential investors, if they play their cards right.

Take-Home Points

• The Russian invasion of Ukraine has had a drastic effect on the international markets. 
• The gold industry has yielded significant attention as it is considered a stable source of maintaining the value of assets.
• Investing in the gold industry would be ideal for either short-term or long-term investors.