Weakness of Geopolitical Playing Field Strengthens Gold

The geopolitical conflict between China and Russia has bolstered the case for gold. Gold prices have been rising as investors have rushed into the precious metal as a safe haven. But the rally has not been without its troubles. As a result, a handful of major mining companies have seen their shares drop.

Short-term driver

There are a number of factors that influence short-term gold prices. One of the most significant is geopolitical turmoil. These events have a relatively small effect on long-term gold price movements, but can have a huge impact on short-term pricing.

Short-term gold prices tend to increase when there is more uncertainty about the future. For example, if the US elections are close, investors may opt to diversify their portfolios and buy some gold.

Geopolitics can also lead to commodity supply shocks. This is particularly true for Europe, which is facing a severe energy crisis. In addition to this, Europe has become heavily reliant on Russia.

Russia is a major supplier of natural gas to the EU. With the reduction in Russian gas exports, there is a potential for an energy crisis in Europe. It is unlikely that the resulting decline in inflation will discourage consumer demand for gold.

However, higher interest rates may discourage institutional investment in the precious metal. The Fed is likely to hike rates through the year, increasing the opportunity cost of gold.

Meanwhile, higher inflation could be a boon for gold as a safe haven. Central banks will likely continue to increase their gold reserves, boosting the market’s demand.

Aside from geopolitics, another major driver of gold prices is supply and demand. Gold plays a role in the global monetary system, so central banks will be interested in ensuring that their currencies maintain stability. Moreover, central bankers in emerging economies are tasked with maintaining orderly capital flows.

Technical analysis

Many investors ignore the geopolitical issues that can impact the price of gold. In fact, these can be catalysts to push the yellow metal higher.

The price of gold has been increasing since June of last year, but its long-term outlook remains uncertain. Analysts expect the yellow metal to gain in value over the next few years. However, a prolonged economic recession will continue to put pressure on the demand for the precious metal.

Russia’s military invasion of Ukraine has put a huge strain on the global economy. Combined with a persistently high rate of inflation, the situation is a recipe for economic recession. Gold has historically performed well in these periods.

Gold’s price has bounced back from two-year lows. Prices are trading between the 200-day moving average and the 100-week moving average. Although the market is still in a buy zone, some analysts have warned that it may drop back down to the $1,800 – $1,820 range.

Nevertheless, the potential for an escalation in the Ukraine is a serious concern for investors. As an alternative to the dollar, gold has gained popularity as a safe haven.

The United States is experiencing decades-high inflation. This puts pressure on the dollar. It is losing its reserve currency function. Therefore, the Federal Reserve will need to print more money in the near future.

A look at the NYSE Arca Gold Miners Index

The NYSE Arca Gold Miners Index is an index that tracks performance of publicly listed equity in the gold mining industry. This index is composed of common stocks of selected gold and silver mining companies. There are three weighted components of the index.

This index was originally launched in December 1996 by the American Stock Exchange. It is a market capitalization-weighted index. The largest weights are currently held by Yamana Gold, Evolution Mining, and Pan American Silver.

The Index rebalances quarterly. A total of 33 names currently make up the index. The average daily value traded is used to select the constituents.

There are a variety of indices and ETFs that investors can use to track gold miners. One of the most popular is the NYSE Arca Gold Miners Index.

Another index that investors can use is the Solactive Global Pure Gold Miners Index. This index is based on free float market capitalization. The minimum weight of this index is 90%. This means that it only includes pure-play companies that generate at least 50% of their revenues from gold or silver mining.

These companies that invest in gold make considerable investments in equipment, workers, and land. They are typically sensitive to short-term price changes in gold. In addition, these firms are also subject to sectoral risk. However, the gold miners sector has recently enjoyed a bull cycle.