Gold prices closed out February with a gain of 6.2% for the month of February. That is much higher compared to the performances of various safe haven assets last month:

READ MORE: What are safe haven assets?

Why have gold prices surged higher?

Gold bulls (those who believe that gold should climb higher) have fed off the Ukraine crisis to make bullion the outperforming safe-haven asset amid Europe’s worst security crisis since World War 2.

Indeed, the crisis in Ukraine is an ever-evolving situation, with investors and traders having to digest a barrage of headlines and adjust their market activities accordingly.

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  • Since the weekend, some Russian banks have been excluded from the SWIFT messaging system. The US government also rolled out on Monday more financial sanctions on Monday, including barring American people and companies from doing business with Russia’s central bank and its wealth fund.
  • Meanwhile, Russia has banned airlines from 36 countries from using its airspace, while rolling out various measures to support its currency, the ruble.

Overall, as Russia and the West try to advance their respective causes, markets are very concerned that it is going to have a major negative impact on the global economy.

Here’s one such narrative:

  1. These sanctions could ultimately hurt Russia’s ability to export crude oil, natural gas, and other important commodities such as wheat, nickel, and aluminium.
  2. When these much-needed commodities become harder to find, at a time when the world needs more of it as the global economy continues reopening, that could drive the prices of these commodities higher.
  3. Commodities are an important driver of inflation. Consider how higher fuel prices makes it more expensive to transport fresh vegetables from the farm to the grocery stores. And as the grocer wants to protect its profit margins and keep the business running, it then has to raise the prices it charges customers.
  4. Ultimately, if inflation runs too high, households could decide to cut back on their spending because things have just become unaffordable.
  5. When spending is decreased significantly, the economy may grow at a slower pace, or worse, even fall into a recession.
  6. There could be a greater chance of a recession if central banks, in their quest to get inflation back under control, get it wrong and raise interest rates too quickly (which means people and households needs to spend more money servicing their loans instead of buying more goods and services that can help support the economy).
  7. If markets get the sense that a recession is becoming likelier, investors and traders may want to preserve their money, selling off “riskier” assets such as stocks and parking the money in safe havens instead.

What’s next?

Markets are on the lookout for more signs that the above narrative could become reality.

Such a scenario should tempt more investors and traders towards gold, which has proven itself to be a worthy safe haven asset for a very long time, even before this ongoing Ukraine crisis.

More headlines this week that show that the Ukraine crisis is deteriorating further, and heightening the negative impact on the global economy, could see prices retesting last week’s highs.

Technical analysis: Gold prices on course for higher highs?

Looking at the charts, the declines in gold prices appear to have coincided with markets trying to catch their breath and ease away from their worst fears.

From a technical perspective, spot prices appear to have pulled back from overbought conditions, with its 14-day relative strength index pulling away from the 70 level which typically denotes overbought conditions.

Such a technical move could help gold set a more solid foundation from which it could launch higher.

Gold then has to stay above the June 2021 high of $1916.39 for a sustained period, in order to convince markets it can climb on to the peaks from November 2020 and January 2021 at $1965.30 and $1959.21 respectively.

Gold has shown of late that it has a tendency to spike first and ask questions later.

These bouts of volatility may present plenty of opportunities especially for gold bulls, depending on developments surrounding the Ukraine crisis, which appears far from over.

 

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.