A look at the economic consequences of the war in Ukraine

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BrusselsReport.eu
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By Jan Van Cutsem, owner of The House, one of Belgium’s most renown gold retailers.

The conflict in Ukraine is affecting many sectors around the globe, as investors fear contagion may continue throughout the economy. Ukraine and Russia are also major exporters of precious and industrial metals as well as grain, but a military blockade could jeopardize exports from Black Sea ports.

The price of aluminium reached its 2008 peak with an increase of nearly 3% to $3,388 per ton in London, while gold reached its highest level in more than a year, rising 3.3% to just over $70.

Nickel also rose 2.4% to $25,085 per metric ton on the news, palladium climbed 4.4% to $2,547 per troy ounce in New York, while wheat futures rose 5.7% to $9.35 per bushel in Chicago as corn prices rose 5.1% to $7.16.

The National Bank of Ukraine, on the other hand, limited cash withdrawals to 100,000 hryvnia per day, equivalent to about $3,339.13.

Trading on Ukraine’s PFTS Stock Exchange was halted, while the yield on a Ukrainian dollar bond maturing in September 2027 doubled in the past 24 hours to 32.060%. This is a level which speaks volumes.

As for Russia, the ruble was trading at 89.8903 on Thursday afternoon, down more than 10% against the dollar, prompting Moscow to announce a currency intervention. Meanwhile, yields on Russian 10-year OFZ ruble bonds reached 10.93%, or their highest level since early 2016.

Russia’s central bank also ordered brokers to ban short-selling as Russian stocks plummeted on Thursday morning, with the benchmark MOEX index losing as much as 45% in early trading on Thursday.

Inflation

The rise in the price of oil to $100 a barrel for the first time since 2014 represents a double whammy to the global economy, as this further dents growth prospects and pushes inflation higher.

This is a worrying development for the U.S. Federal Reserve and for its fellow central banks, as they attempt to counter the strongest price pressures in decades without derailing the pandemic recovery.

The dramatic escalation of the crisis in Ukraine raises fears of disruption to critical energy exports from the region. Even if energy exporters benefit from the boom and oil’s influence on economies no longer is what it once was, much of the world will take a hit, as businesses and consumers witness their energy bills rising and their purchasing power squeezed by more expensive food, transportation and heating.

In an analysis of the winners and losers of the oil boom, Bloomberg Economics estimates that Saudi Arabia may expect a windfall, Russia would also gain, as well as smaller oil exporters, like the United Arab Emirates. The biggest losers would be energy importers like South Korea, India and Japan.

“The rise of oil prices will increase pressure on central banks worldwide to advance their tightening cycle and raise interest rates more aggressively to contain inflation risks,” Chua Hak Bin, senior economist at Maybank in Singapore thinks.

More broadly, JP Morgan Chase & Co. is warning that an increase in the oil price to $150 a barrel would nearly halt global economic growth and push inflation to more than 7%, which is more than three times the rate aimed for by most monetary policymakers.

The cost of a basket of commodities is now more than 50% higher than it was a year ago, according to Gavekal Research Ltd. a consultancy.

The energy crisis also continues to exacerbate the problems in global supply chains, as it drives up costs and delays deliveries of raw materials and finished goods.

The International Monetary Fund recently raised its forecast for global consumer prices to an average 3.9% in advanced economies this year, compared with 2.3% and 5.9% in emerging and developing countries respectively. It remains to be seen whether these forecasts will be adjusted downward again.

Gold and silver

Gold prices went up sharply on Thursday, with investors looking for a safe haven, as Russia invaded Ukraine. The spot price for gold increased with 2.1% to $1,970 per ounce, which is around its highest point in a year.

The rise in the gold price coincided with large drops in the price of risky assets, suggesting how fear had hit investors. Over the course of the day, the gold price folded back a bit to near $1,905 on Friday morning.

The Dow Jones Industrial Average futures plunged more than 600 points as of 5:45 a.m. ET, only to move back and forth a bit. In the end, the Dow closed just under 100 points higher. Russia’s main stock market dropped about 45% at the opening, before recovering some of the loss. Markets in Europe were also under considerable pressure, with sentiment even more ruined as crude oil broke through to $104 a barrel.

The price of gold is up about 8.3% since the beginning of January. The SPDR Gold Shares ETF is up 4.3% year-to-date, compared to a decline of more than 11% for the S&P 500, and shares of gold producers have skyrocketed in empathy.

Barrick Gold shares are up 18% over the past month, while Newmont Mining is up 8%. Jefferies‘ strategy team announced on Thursday in a new report that they had taken long positions in gold miners.

Mark Bristow, CEO of Barrick Gold, stated on Yahoo:

“The last 50, 60 years gold has always been a stabilizer in a portfolio. You should have around 5% of your portfolio in some sort of gold package. That really helps you through difficult times.”

On his turn, Frank Holmes, the CEO of US Global Investors, commented that gold has historically performed well during political crises, as he sees the price climbing as much as 50% higher from current levels, stating: “It’s a non-event for gold to go up or down 20% in a year. (…) Two years ago it went up two standard deviations for the first nine months, so if it were to do that again, then it could go to $2,800. That would be up two standard deviations, and that wouldn’t be extraordinary. Three standard deviations over twelve months is. I think [gold] is undervalued. I think it’s probably worth about over $4,000 if you use money printing number data, then you’re talking $7,000 or more. I feel comfortable that gold can easily run to $2,500 or $3,000.”

Originally published on consul-fund.be

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