Rate hikes and risk aversion propel gold, grain scarcity creates value, and gas dependency creates opportunities to influence.

The U.S. Federal Reserve’s (Fed’s) tightening monetary policy and the risk posed by a new cold war, the global grain shortages because of the Russia-Ukraine conflict and Europe’s dependence on Russian gas are key factors that are expected to make gold, grain and gas the most valuable asset class in 2022. The Russian invasion of Ukraine, a rising interest rate scenario, and commodity supply chain chokeholds will mean more investors shifting from risk assets to real assets.

Gold was just shy of its all-time high in March 2022 (US $2,070 per ounce on March 8, just short of a record high of $2,075 in August 2020), while wheat prices jumped 37%, and corn prices soared 21% so far in 2022 after rising more than 20 percent in 2021.

Earlier this week, U.S. crude oil prices jumped to $100.84 a barrel. Natural gas prices soared as well. “Natural gas prices spiked this year and extended their climb Thursday, bucking seasonal trends as demand from overseas continues to pressure inventories. The U.S. natural-gas futures for May delivery rose 2.5% Thursday to around $7.1810 per million British thermal units—a 92% rise in the year to date,” reported the Wall Street Journal on Thursday, April 14, 2022.

Gold erases 2021 loss

Precious metals like gold and silver underperformed (negative returns) and lagged behind several other asset classes in 2021. However, given that the Fed approved an interest rate hike last month and pencilled in six more increases this year, it is expected that gold will thrive as it typically does in rate-hike cycles. In fact, past monetary tightening cycles saw gold outperform U.S stocks and the dollar.

In times of trouble and crisis, investors look for safe havens, and the Russian-Ukraine conflict sparked an uptick in gold as a safe-haven asset, with the yellow metal’s price rallying by more than six percent in February, the month of the invasion, even as the war walloped risk appetite.

Russia has the world’s fifth biggest gold stockpile. Its recent announcement pegging the Russian ruble to gold may not only make the ruble stabler and stronger, but should the war escalate and the Western allies impose more punitive measures against Russia, Moscow in turn may mandate trade payments for Russian commodities to be paid in ruble or gold. Such a move could push gold prices even higher.

Sanctions and commodity supply shocks fuel the surge in gas and grain prices

The series of sanctions imposed on Russia over its invasion of Ukraine has upset the oil supply-and-demand balance (hurt trade balance), stoked inflation and further disrupted the already stretched global supply chains.

Europe relies on Russia for almost 40% of its imported natural gas to help heat millions of homes, generate electricity and power factories. While Europe is courting Qatar, the world’s second largest exporter of natural gas, for an alternative to Russian gas, Qatar is aware that it is impossible to replace long-term Russian gas supplies to Europe overnight. The inability of Europe to wean itself off Russian gas will deepen the continent’s energy crisis, particularly if Russia decides to withhold gas supplies from Europe.

From nickel to copper and from oil to wheat, commodities supply chains have been fractured, resulting in an increase in oil and gas prices. In particular, grains supply (wheat, corn, barley, rye and maize, and sunflower seed products) have been hit hard, and that has driven food prices up.

Russia is the world’s largest wheat exporter. Together, Russia and Ukraine supply 30% of the world’s wheat and barley and are also large agricultural suppliers for rye, corn, maize and other grains. With Ukrainian ports closed because of the armed conflict and Russian grain deals on hold because of economic sanctions, 13.5 million tons of wheat and 16 million tons of maize from last year’s harvest in Ukraine and Russia are stuck, according to a recent report published by the United Nations World Food Programme.

Conclusion

Geopolitics and supply issues have led to a sharp rise in commodity prices in 2022. The uncertainty surrounding the war and these vital asset class exports (gold, grains and gas) will result in further price hikes in the energy, grain and precious metals sector.

The current global supply-demand deficit for grains and gas is larger than analysts expected, and the most favoured safe-haven asset in times of turmoil, gold, is set to benefit as risk averse investors increase exposure to it amid pullbacks in risk assets. No surprises here that scarcity, dependency and risk aversion will help grains, gas and gold emerge as the most valuable commodities in 2022.