Gold Gains Momentum: Preparing for Market Moves During Ukraine Negotiations

Gold continues to rise for the fourth consecutive day, regaining the level of $2,670 per ounce, which represents the highest levels in ten days.

Gold’s gains come amid the mutual escalation on the Russian-Ukrainian front, which sparks fears that the conflict is entering a new phase that may not be contained.

Amid this escalation of geopolitical concerns since the weekend, the physical gold exchange-traded fund SPDR Gold Trust (P:GLD (NYSE:GLD)) has recorded positive net flows throughout the past sessions this week, in addition to those from last Friday, which totaled nearly $694 million.
Meanwhile, the GLD ETF has never recorded net positive flows for four consecutive sessions except since last March.
These inflows towards GLD and the gains in the yellow metal come in defiance of the growing pessimism about the possibility of cutting high interest rates in the US next year, which may highlight the state of uncertainty that the markets are experiencing.
This pessimism comes in turn from the possibility of inflation returning to the rise – which has already accelerated in October – in addition to the cautious statements from Federal Reserve officials, led by Jerome Powell.

As markets no longer expect a 25-basis point interest rate cut in January, with a probability of only 15%, after it was highly likely more than a month ago, according to CME FedWatch Tool figures.

Geopolitical factors continue to return to the forefront again with the recent step taken by the US administration, which is sending anti-personnel mines to Ukraine. This comes after allowing Ukraine to use advanced ATACMS missiles to target the Russian depth, which actually happened and resulted in Russia amending its nuclear doctrine.

These mines were banned from Ukraine during the past two years of war, and are subject to wide international restrictions. While these mines may be used to confront Russian advances in the Ukrainian depth. Therefore, I believe that this step may be in the context of Ukraine’s quest to retain as much territory as possible and increase military pressure in order to strengthen its negotiating position in any potential talks.

Russia has already been increasing its pressure in an unprecedented manner in recent weeks, in what may seem like a preemptive move for any negotiations under the new Republican administration, as it needs to expand its control – currently around 70-80% according to Reuters – over as much of the territories it has annexed to its sovereignty as possible.

While Reuters says, citing sources, that Russian President Vladimir Putin is open to discussing a ceasefire agreement, he rules out making any major concessions on the annexed territories. However, the sources also said that there is still room for negotiation on the division of those territories.

However, what may be worrisome about this mutual escalation, even if it ultimately aims to sit at the negotiating table in a strong position for both sides, is that it may involve the risk of misrepresentation, especially with the return of talk of using nuclear weapons again.

While the containment of this escalation and the inability of the newly supplied weapons to Ukraine to shift the balance of power in a signeficent in the latter’s favor may reduce concerns about the conflict getting out of control. This may redirect attention back to market fundamentals that may not be in favor of the yellow metal with concerns about the return of rising inflation and higher-for- longer rates.

Written by Samer Hasn, Senior Market Analyst at XS.com