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War, Inflation and Rate Hikes Push Silver & Gold Higher in Q1

Jeff Clark, Senior Analyst, 
APR 6, 2022

The headlines were big in Q1, and at the end of it all silver and gold were higher.

Our quarterly report looks at the performance of gold and silver vs. other major asset classes during the first quarter of 2022, along with a watchlist of catalysts that could push them higher this year.

Silver and Gold Lead Most Assets

A cocktail of nasty events transpired in Q1: Russia invaded Ukraine, inflation stubbornly continued to rise, the stock market became volatile and weak, and the Fed hiked interest rates. How did silver and gold respond to these events?

Q1 Performance of Major Asset Classes

Silver rose 7.5%, while gold was 6.7% higher. It was gold’s biggest quarterly gain since mid-2020. Even bonds lost value. Investors clearly sought the ultimate safe haven assets as the various crises played out.

Crude oil made headlines, its price pushing higher by over a third in the first three months of the year. Commodities, already impacted by supply chain issues, also jumped.

Equity indexes all finished lower. And in a surprise to many mainstream investors, it was the worst quarter for U.S. bonds in over 40 years. And bitcoin (not shown) did not serve as a safe haven as some had claimed it would, losing 1.7%.

The Q2 Watchlist

A number of ongoing issues provide context for the quarters ahead.

Geopolitical Conflicts. Gold spiked at the start of Russia’s invasion of Ukraine, and has since given some of the “war premium” back. While we all hope for resolution of the armed conflict, gold served its purpose.

President Biden recently signed a $768 billion defense policy bill, a major increase in military spending, highlighting the fact that geopolitical conflicts remain unresolved.

Inflation. Rising prices hit consumers hard in Q1, in virtually every segment of society…

  • Gasoline prices, already high, spiked further from the war in Ukraine and the resulting sanctions. Some states are considering reducing gas taxes, offering rebates, and in the case of Chicago offering free gas and public transit cards.
  • With the jump in Covid cases in China, Shanghai has imposed strict lockdowns, further pressuring already strained global supply chains.
  • Reports show consumers are cutting costs on necessities, everything from toothpaste to baby formula, items normally resistant to price increases.
  • Wages, already in an uptrend due to worker competition, continue to climb. Some economists insist that rising wages imply even higher inflation.
  • The risk of stagflation has grown. Numerous analysts say the war in Ukraine and the sanctions on Russia will slow the global economy.

I should also point out that the persistent rise in the CPI highlights the Fed’s misstatement from a year ago..

How Much Can You Trust Fed Proclamations?

And now the inflation bug-a-boo has forced the Fed to institute a new cycle of…

Interest Rate Hikes. The Fed added a quarter point to the funds rate on March 16. The debate now is how many more rate hikes the Fed will do.

While banks and analysts have various predictions, the Fed’s predicament is real. On the one hand tightening could cool inflation, but on the other hand it could hamper growth and increase the odds of stagflation or recession.

Many view the Fed as “behind the curve,” so the likelihood of further rate hikes seems inevitable. How does gold perform during rate hike cycles?

Gold During Rate Hike Cycles

To the surprise of many in the mainstream, gold has a tendency to rise during rate hike cycles. While it may seem counterintuitive, it’s a result of the circumstances that compel the Fed to raise rates in the first place.

I have to ask, though, how much can the Fed realistically raise rates? Debt service costs will naturally increase, which has some analysts saying the Fed will purposely remain behind the curve.

U.S. Dollar. Global events have made the dollar more vulnerable. Even Goldman Sachs has highlighted the risks to its clients, starting with the potential fallout from the sanctions on Russia. This could push some countries around the world to move away from the dollar, eroding its global dominance. They point out the dollar has similar challenges the British pound faced in the early 1900s. That Goldman released a research note on “de-dollarization” is a major sign that investors are taking those risks seriously. It also means that cross border investing will slow, maybe dramatically.

U.S. Midterm Elections. While not until early November, it goes without saying that the US is experiencing elevated levels of partisan polarization, gridlock, and radicalization. Democrats have a minor advantage in the House and a thin majority in the Senate; since some voters are frustrated with President Biden’s handling of inflation and other issues, Republicans would be in a position to block any legislative move by winning one chamber. This will likely push Democrats to make big changes before the election, including social spending and perhaps higher taxes, the latter of which could hurt equities.

2022 Demands Silver and Gold Ownership

It’s hard to imagine a more ideal scenario for gold and silver…

  • These challenging times have threatened the status quo, the consequences of which are hard to predict.
  • Russia had $630 billion in foreign currency reserves—until the US and its allies cut them in half. The ramifications of those actions have only just begun. The adage that “money is a government liability” has been proven out.
  • Record high grain prices are reminiscent of the Arab Spring, which started because of food inflation. The issues pushing food prices higher cannot be easily resolved.
  • Debt and deficits remain at or above record levels. On top of that, the boost in tax revenue many advanced economies got last year from higher stock prices is absent so far in 2022.

Add it all up and the need for a true safe haven asset is clear. With unresolved trends encompassing much of the globe, I expect to see the gold price reach new record highs this year.