Commodities in Conflict – How Gold Trading Has Been Affected by the War in Ukraine
The thing about political unrest is that its echoes can seldom be contained. And we know this by now, because as humans, our time spanning the ages has been peppered with epochs of conflict, and the affects never stay regional. And here we are again – in the midst of more tension already reverberating throughout the globe. But as the Russian war machine rumbles through the Ukraine – and although it’s a global concern, indeed, and one that looks set to test our mettle as a species, especially as a one-two punch after the pandemic – we can’t forget that compared to those at ground zero, our concerns are minuscule.
But we can still speculate and talk about it here – particularly as a society interested in how different political views and decisions can resonate the world over, and especially via one of its most revealing, influential and candid properties – trade and investment.
Commodities and the effect of unrest
Commodities, as we know, are physical goods that are traded in markets, sorted into three broad categories – namely, agriculture, energy and metal. They’re the raw materials – the primary products – that are used to create many of the items we as consumers pluck from supermarket shelves, pay for to power our homes and cars, and point to in jewellery store windows. And of course, they fulfil industrial specification, too, with many of these commodities vital in machining, manufacture, and mining – to name a few.
Now, the facilitating structure that defines the rise and fall in the markets, when concerning each of these commodities, is one with import and export as its powering nucleus. You see, countries rich in desired commodities use these resources as trade, to fund economies and grow relationships with other countries, and particularly global powers. Because commodities are regional, continent and country-bound, there will always be markets seeking the resource their locale can’t spawn. But commodities trading is volatile, and timid – unrest in a country that produces, say, oil, will directly affect that region’s standing as a resource to other markets. And because of it, prices for oil will then soar, that country’s economy becomes tenuous, and a ripple effect is also often seen, throughout every facet of the world’s economic ecosystem.
Let’s touch on a few cases in point, that the Russian-Ukraine conflict has brought to the fore, so far.
The food disruption
Russia and the Ukraine combined, are two regions that own significant commodity pipelines – particularly that of wheat and grains. To pinpoint that level of supply, worldbank.org, in an article titled How the war in the Ukraine is reshaping world trade and investment by Michele Ruta, mentions that the two regions account for a vital 25 percent of the world’s wheat exports, and a significant 14 percent of the global corn provisions. Ruta then goes on to stipulate that: ‘Many countries around the world are heavily dependent on these flows. The Republic of Congo, for example, relies on imports from the Black Sea region for 67 percent of the wheat it consumes.’1
The energy disruption
After food prices, the most influenced commodity price for the region is energy – particularly via Russia. ‘Russia is one of the world’s biggest energy suppliers,’ continues Ruta, ‘providing 14 percent of its crude oil and 9 percent of its natural gas globally.’1 In reference to a predictive simulation generated by worldbank.org, Ruta elaborates on the global effect of this kind of energy disruption: ‘Our simulation generates a 7 percent increase in the price of crude oil, which in turn raises the costs of transportation and production in manufacturing, leading to a drop in exports.’1
Gold trading and its position during the unrest
So, that’s just an idea of the kind of all-permeating ripple effect a conflict at such a level can have on specific, influential commodities driven by these regions. But if you’re reading this, you’re particularly interested in gold trading, and the fluxes in gold trading prices that will now inevitably start to reflect in sheets and trader resources.
Interestingly, though, there’s another facet at play here, to wit: gold’s standing as a safe haven investment.
As defined by Investopedia: ‘A safe haven investment is one that is expected to retain or increase in value, during times of market turbulence.’³ And it’s obviously in that fact that lies the very reason we’re talking about all of this right now. Because, as investors, we’re anticipating the inevitable increase that comes for gold trading, with this level of geopolitical tension. In an article written for business-standard.com, titled Gold rush: Russia-Ukraine conflict to push global gold prices to $2,000, IIFL Securities VP, Research, Anuj Gupta mentions the same: ‘Geopolitical tensions, sanctions over Russia as well as sell off in equity markets and the depreciation in currency will increase gold demand. We expect it to reach $2000 in international market… .’² And it looks like that point has been tracking well. In March, when that article was written, gold prices were hovering at $1,970 per ounce, a resistance level that, according to Tapan Patel, Senior Analyst (Commodities), HDFC Securities mentions was: ‘…the biggest weekly gain in the last two years.’¹
But why such volatility in movement for gold in particular? Well, because of the commodity’s very influence on the global economy. In the same article, Kshitij Purohit, Lead of Commodities and Currencies CapitalVia Global Research, breaks it down: ‘Gold’s influence on the global economy has been amplified by the synergistic effect of both geopolitical instability and existing inflationary pressures. Gold prices have risen to their highest level since August 2020.’² This speaks volumes for the savvy gold trader.
Our point is this, though: this is a market habit that looks set to continue to take hold now in 2022. Gold trading prices will continue to rise – as long as the claws of geopolitical unrest in the Ukraine remain as deeply embedded into our global hive psyche, during this time when all of us are holding collective breath, and as the economic structures that dictate trade continue to balance on a glinting knife’s edge.
To conclude, Ruta, in How the war in the Ukraine is reshaping world trade and investment has an inclusive point about the conflict, that wraps up its far-reaching echoes, and not just for gold trading. He states that it’s: ‘…causing worldwide disruptions to trade and investment, affecting auto makers in Europe, hoteliers in Georgia and the Maldives, as well as impacting consumers of food and fuel globally.’¹ This level of disruption and change to markets, is information that’s good to know for our strategy as traders. But, and at the risk of digression from the main points of this article, we’ll mention briefly that it’s also information that has to be disseminated, lest we forget those that are directly, and more significantly affected.
As always though, and as traders, we never cease to be humbled by the market’s intricate connection to the power of global geopolitical influence – and not just in times of volatility, but the prosperous ones, too. And it’s happening again as we speak.
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