A Global Energy War Is Imminent

During negotiations held in Belarus, the parties made a third attempt to ease the bloody conflict; however, negotiators cautioned against expecting the next round of talks to yield a final outcome. Russia’s invasion of Ukraine represents the largest-scale attack on a European country since World War II.

The prospect of an energy war between Russia and the West has heightened concerns that the conflict could escalate. The United States is urging its allies to impose a ban on imports of Russian oil as punishment for Moscow’s invasion of Ukraine. On Monday, U.S. President Joe Biden held a video conference with the leaders of France, Germany, and the United Kingdom, seeking their support for such a ban.

However, Germany, Europe’s largest economy, opposes a complete halt to energy imports from Russia. German Finance Minister Christian Lindner said on Monday that Germany currently has no plans to stop importing Russian oil, natural gas, and coal.

Russia, for its part, has warned it may cut off natural gas supplies to Germany via pipeline in response to Berlin’s decision last month to suspend the commissioning of the controversial Nord Stream 2 pipeline. Sources indicate that the United States is prepared to act on its own, without the involvement of its European allies, if necessary.

Russian Deputy Prime Minister Alexander Novak said on Monday that if the United States and the European Union were to ban imports of Russian oil, oil prices could surge above $300 per barrel. “It is clear that rejecting Russian oil would have catastrophic consequences for the global market.”

According to estimates by Oxford Economics, the surge in oil prices will push March’s inflation rate up by about 0.6 percentage points, but this figure could easily be surpassed in the coming months.

Many countries on the European continent are heavily dependent on Russian energy. The West cannot simply flip a switch to impose a complete ban on imports of Russian goods; the process will take a considerable amount of time. However, demand for gold shows no signs of waning, making it unlikely that gold prices will give up their recent gains in the near term.

　　The Federal Reserve Forced to Deviate from Its Accelerated Rate-Hike Path

Russia’s invasion of Ukraine and the prospect of an impending energy war have intensified concerns about inflation. Over the past week, U.S. gasoline prices posted their largest increase in nearly 17 years, while prices for food and other goods are beginning to rise as well, dashing any lingering hope that U.S. inflation might ease.

Tim Duy, an economist at SGH Macro Advisors, noted: “Some had originally expected February to mark the peak of the annual headline inflation rate, but the impact of the situation in Ukraine has rendered that forecast untenable.”

Even before Russia’s invasion of Ukraine, U.S. inflation in February was already expected to hit a 40-year high, with some analysts going so far as to predict that the Federal Reserve would raise interest rates by 50 basis points on March 16. Yet now all of this could trigger a nightmare scenario for the Fed: inflation expectations become destabilized, forcing the central bank to abandon its planned pace of rate hikes.

“Deutsche Bank analysts say that the expectation that inflation has temporarily peaked may be fraught with risk: an oil-price shock could push inflation expectations higher in the coming months. As price pressures intensify and labor-market tightness fuels faster wage growth, a renewed rise in inflation expectations could further fuel concerns that inflationary pressures may prove more persistent.”

Federal Reserve Chair Jerome Powell said last week that, given the uncertainty surrounding the impact of the war in Ukraine, the Fed will proceed with caution—though persistently high inflation will exert significant pressure as Fed officials outline their projections for the path of interest-rate hikes over the coming months. Powell also noted that, based on historical experience, a $10 increase in oil prices is estimated to push inflation up by 0.2 percentage points and reduce economic growth by 0.1 percentage point.

According to the latest data released by the World Gold Council (WGC), global gold ETFs recorded another net inflow of 35.3 tonnes in February—equivalent to roughly US$2.1 billion, representing a 1% increase in assets under management—driven by persistently high inflation and heightened geopolitical risks stemming from Russia’s invasion of Ukraine.

Financial market conditions are tightening.

Nellie Liang, U.S. Under Secretary for Domestic Finance at the Treasury Department, said on Monday that since Russia’s invasion of Ukraine and the imposition of stringent Western sanctions on Moscow, financial markets have begun to exhibit signs of strain, with pressure evident in widening bid-ask spreads and a modest increase in the cost of long-term unsecured financing.

Nellie Liang stated: “We will remain vigilant about the implications of recent events. Some key emerging risks appear to differ from those in the past, requiring regulators to adopt a flexible approach to ensure the financial system continues to maintain its resilience.”

Rene Albrecht, a strategist at DZ Bank, said: “If central banks take their mandates seriously, we will see further tightening of financial conditions. Economic momentum will slow further, yet inflation will remain elevated, triggering second-round effects and ultimately leading to stagflation.”

Driven by soaring energy prices, a stock market downturn, and the Russia-Ukraine conflict, global financial conditions—widely regarded as closely tied to future growth—are now at their tightest in two years, prompting risk-averse capital flows that have already bolstered and will continue to strengthen the U.S. dollar.

　　Spot gold eyes $2,027.

On the daily chart, gold has initiated a five-wave upward move from $1,779. On the hourly chart, gold may be in the beginning of an ((iii)) wave upward from $1,878, having already broken above the 61.8% target level of $1,998; the next resistance lies at the 76.4% target level of $2,027. The ((iii)) wave is a sub-wave of the five-wave sequence.

This article is from Hexun Gold: http://gold.hexun.com/