The dramatic escalation of tensions between Russia and the West, as Russia begins its military operations in Ukraine, presents a range of implications for precious metals and speciality metals, as well as for broader commodity markets. Increased safe haven demand has sent the gold price to a 17-month high, while energy costs are rising sharply, amid broader supply chain issues for raw materials. Gold’s rally highlights the diversification benefits of an allocation to precious metals, as global stock markets and risk assets such as cryptocurrencies face heavy losses amid heightened volatility.
Baker Steel’s Precious Metals and Electrum strategies are actively positioned to offer investors important diversification in troubling times, while managing portfolio risks in this volatile environment. Russian exposure (which is held via equities listed on established western exchanges only) had already been reduced recently and today represents c.1% of the Precious Metals strategy and c.1.5% for Electrum.
While the impact on precious metals’ near-term outlook is clear, broader commodity markets also offer opportunities for investors, which we have been able to take advantage of in the Electrum strategy. Rising costs and tight supply chains are core themes for Electrum, which influence our stock picking. The Ukraine crisis and subsequent incoming sanctions against Russia will likely exacerbate existing supply issues, particularly for nickel, PGM and vanadium markets, of which a significant portion of production is Russian, and where markets are very tight already. Energy prices, which were already rising prior to the Ukraine crisis, are surging. Commodities particularly impacted by higher costs include aluminium and fertilizer, and we expect to see higher prices ahead for these materials.
Aside from the Ukraine crisis, we are seeing positive signs for precious and speciality metals at present. After a challenging start to the year, we expect the recent headwinds for the gold sector to continue to abate in the months ahead, particularly as we approach the start of the US rate hike cycle and as clarity grows over the limited scope for higher real rates. Meanwhile speciality metals face a highly positive demand outlook as the green revolution gains pace and the global shortage of critical raw materials grows. Overall, mining is one of the few equity sectors offering value, dividends, and selective growth. A rotation towards value investing, over growth, could drive a period of “catch up” outperformance by miners, many of which offer strong margins and rising dividends.
You can read more about our views on the interplay between gold, inflation, interest rates and geopolitics here.