It could challenge the highest level we have seen in since 1979. If this unfolds, we would see gold move exponentially higher.
Gold Fundamental Analysis
The primary factor that is taking gold well above $1900 over the last three trading days is inflation with a twist. The twist magnifies the current level of inflation and accelerates the level at which it is growing, and quickens the timeline to achieve that. Inflation began to spike long before Russia invaded Ukraine. It has been running rampant this year well above levels seen over the last 40 years.
USD Inflation rate chart
The facts speak for themselves; in 2019 inflation was running between the low of 1.5% to the high seen in December at 2.3%. In 2020 inflation ranged between 2.5% to a low of 1%. However, 2021 was the beginning of a cascading effect with consecutive inflationary spikes throughout the year. While the average inflation rate in 2021 was 4.7%, it contained five months in which inflation was above 5% and two months in which inflation ran as hot 6.2% and 6.8%.
While we only have two months for inflationary pressures this year, they are astoundingly and shockingly high. The CPI for January came in at 7.5% year-over-year. In February the CPI inflation index scorched previous highs for the last 40 years coming in at 7.9%. The government report for the March numbers for inflation will not be available or released till April 12.
The twist – how Russia’s invasion of Ukraine has affected imports into the European Union
Analysts including myself have written immensely about the root causes of inflationary pressures and what differentiates inflation based on black swan events such as the pandemic, but for the first time since we’ve seen inflation spike higher, there has been a new additional force that could skyrocket the rate at which inflationary pressures are currently growing. I’m speaking directly about the added inflationary pressure that will be a direct result of Russia’s invasion of Ukraine.
The most important food export in the world continues to be grain. During the first ten months of 2021, Russia exported $388.4 billion in grains which was an increase of 42.8% year-over-year. The primary recipients were China, Germany, and the Netherlands. According to the International Food Policy Research Institute, collectively Russia and the Ukraine exports represent 12% of all the food calories traded in the world as of March 11, 2022.
Ukraine is the second-largest supplier of grains to the European Union. Their primary export to the EU’ is barley and wheat. More alarming is that Russia is a world leader for exporting wheat and ranks as one of the top exporters for global sales of crude oil, refined petroleum oils, and coal.
These are the facts as they have existed from 2021 up until today. However, in November 2021, satellite imagery first the global intelligent community that Russian troops had begun to amass on the board of Ukraine. Russia denied any plans to invade Ukraine, and the vast majority of political and military analysts said Russia would be unlikely to begin a full-scale invasion.
That all changed exactly one month ago when on February 24, when Russia officially invaded Ukraine. This created yet another black swan event that will immensely impact the cost of goods and services worldwide taking current inflationary levels to a much higher level.
Besides the geopolitical tension that this war has elevated, its effect of reduced exports of necessary goods and services by Russia and Ukraine will make the former supply chain bottleneck look like a walk in the park. The consequences are dire, and there are no solutions as long as Russia continues to invade Ukraine and the war continues to escalate.
Gold Price Prediction
It is for that reason we have seen gold begin to react dynamically moving to higher prices. This month gold traded $10 below the record high set in August 2020. I am one of many analysts that are predicting gold pricing to move to a new record high. In yesterday’s article, I put numbers as to where I believe gold could go based on technical studies.
However, the studies are founded upon exceedingly strong fundamental events that most certainly will impact inflation but most probably could take it to the highest levels we have on record, except the inflation rate of 23.70% in June 1920.
The current record level of inflation occurred during March and April 1980 when inflation hit 14.6%. It is the year 1980 that reporters and analysts have been comparing current inflation levels to. With inflation currently at 7.9%, which is a 40 year high based on the fundamental pressures taking inflation higher we could easily reach and exceed inflation at 15% if left unchecked.
March 24 Kitco forecast
As of 6:30 PM EDT gold futures based upon the April contract is currently at $1958.60, and basis the June contract, which will become the most active contract month next week, is currently fixed at $1963.90.
Gold will continue to gain value as long as inflation continues to run hotter. That is why we focused upon the current level of inflation and that all things being equal as long as the war continues to rage and Ukraine it is virtually impossible that we will see inflationary pressures worldwide decline. As such gold may trade to an all-new record high.
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Gary S. Wagner has been a technical market analyst for 35 years. A frequent contributor to STOCKS & COMMODITIES Magazine, he has also written for Futures Magazine as well as Barron’s. He is the executive producer of "The Gold Forecast," a daily video newsletter. He writes a daily column “Hawaii 6.0” for Kitco News