Gold’s short-term shine: geopolitical risk and EU reserve plans drive favourable outlook

Gold will remain favourable in the short term due to the uncertainties in the geopolitical environment around the world. 

The ongoing EU plans regarding frozen Russian reserves serve as a further compelling reason to favour gold.

Plans have existed for some time to utilise the Russian central bank’s frozen assets, which exceed EUR 200 billion, as security or collateral for a loan to Ukraine.

EU reserve plans and Eurozone’s reduced appeal

With the US having suspended aid payments to Ukraine, the responsibility for financial support now falls urgently to the EU.

This assistance is critical, as the Ukrainian government’s treasury funds are projected to be depleted by April, according to Commerzbank AG.

“When rumors of this first emerged, we warned that such a move would reduce the attractiveness of the eurozone as an investment location and thus cause lasting damage to the euro,” Thu Lan Nguyen, head of FX and commodity research at Commerzbank said in a report. 

Fears persist that the single currency’s role as a haven could be jeopardised, she added.

One of the beneficiaries of this, however, would probably be gold, as we have already seen this year when the US dollar’s safe-haven status was dented by US tariff policy and attacks on the independence of the US Federal Reserve.

For an investment to be considered safe, there must be reasonable certainty that the principal (adjusted for value) is recoverable and accessible at any time, Nguyen further noted. 

This safety is compromised if the investment is subject to confiscation by the investing state without recourse.

Consequently, safe havens are typically absent in authoritarian states where the rule of law is not firmly established.

“Of course, the impact on the euro will depend on how the plan is implemented in practice,” Nguyen said. 

The EU leadership is presumably aware of the need to prevent this action from being widely viewed as a clear breach of existing rules.

“This could reinforce a trend that has already been observed in recent years: although the US dollar’s share of global foreign exchange reserves has been falling for years, the euro has hardly benefited from this,” Nguyen said. 

Gold: a politically free asset

Gold has surpassed the single currency as the most important reserve asset. 

The freezing of the Russian central bank’s reserves—mostly held in Europe—following the Ukraine conflict, along with the sovereign debt crisis and Brexit, is likely to have left a bitter aftertaste.

Gold is inherently “politically free” because it is an asset that no foreign state or state institution has the authority to control or liquidate, meaning it cannot be easily seized, Nguyen argues. 

According to the World Gold Council’s most recent survey, the significant rise in central banks’ gold purchases in recent years is not primarily due to sanctions, as many respondents indicated this was only a minor factor for them.

The increase in the share of gold within central bank reserves since the conflict in Ukraine began is noteworthy, especially considering that a significant portion of gold acquisitions over the past three years has been conducted confidentially.

“However, it is also unlikely that central banks will increase their gold reserves indefinitely. After all, the purpose of reserves is to secure foreign trade, i.e., to provide importers with sufficient foreign currency to pay for their goods, Nguyen said.

This is hardly possible with gold, however. The precious metal serves primarily as a store of value and is converted into foreign currency as soon as it is needed as a means of payment. 

Large buyers, such as the People’s Bank of China (PBoC), have recently reduced their gold acquisitions. This reduction is likely due to the already elevated price of gold acting as a growing deterrent.

Nguyen concluded:

Overall, however, developments at the political level support our expectation that the environment for gold will remain favorable, at least in the short term, and that a sharp price correction is unlikely for the time being, despite the already strong rise.

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