(Kitco News) The gold market is closing the first quarter of 2022 with the best gains since Q3 2020 — when the precious metal was in very high demand and scored new record highs of above $2,060 an ounce.
Gold has gained more than 6% in the first quarter, with spot prices last trading at $1,944 an ounce. This is an impressive turnaround for the precious metal, which wrapped up 2021 down 3.7% — gold’s worst year since 2015. The price surge was apparent when gold made a run for record highs earlier this month, pushing well above $2,000 an ounce.
The safe-haven metal surged in demand after Russia’s invasions of Ukraine. Geopolitical uncertainty coupled with even higher inflation triggered a new wave of inflows into the sector. Also, the yield-curve recession signals have boosted gold’s investment case as the 2-year and the 10-year spread briefly inverted in March.
“Safe-haven flows are the name of the game for gold. So long as material progress on ceasefire talks and de-escalation remains elusive, haven flows are likely to keep the yellow metal propped up against an increasingly hawkish Fed backdrop,” said strategists at TD Securities.
During the last trading day of the quarter, gold once again rallied after Russian President Vladimir Putin threatened to halt the country’s gas exports if “unfriendly” countries refused to pay in rubles.
“In order to purchase Russian natural gas, they must open ruble accounts in Russian banks. It is from these accounts that payments will be made for gas delivered starting from tomorrow,” Putin said in televised remarks. “If such payments are not made, we will consider this a default on the part of buyers, with all the ensuing consequences. Nobody sells us anything for free, and we are not going to do charity either – that is, existing contracts will be stopped.”
In response, gold pared all daily losses and rallied another $10, with April Comex gold futures last at $1,944.40 an ounce.
“[Putin’s decree] puts Europe in a tough position and raises the risks of greater pricing pressures. Gold will remain headline-driven and seems poised to make another run higher as the latest Russian move on gas contracts suggests a breakthrough in peace talks seems very far away,” said OANDA senior market analyst Edward Moya. “Gold will find major resistance at the $1970 level, but if that isn’t much of a barrier, a clear path to $2,000 could emerge.”
The outlook for gold remains positive for the rest of the year, but Bloomberg Intelligence suggests pairing the precious metal’s exposure with Bitcoin to achieve the best results.
“The likelihood of economic collapse in Russia, a high probability of recession in Europe and China, and rising potential for the same in the US (as indicated by the inverted yield curve), may buoy the performance of gold vs. most assets for much of the year,” said Bloomberg Intelligence senior commodity strategist Mike McGlone. “We view old guard gold as exposed in portfolios if not paired with the up-and-coming digital rival.”
Palladium is also posting the best quarterly gains since Q3 2020 after registering new record highs earlier in March. At the time of writing, palladium — the auto-catalyst metal — was at $2,260 an ounce.
On the other hand, it was the worst quarter in two years for stocks, with risk-off sentiment dominating the markets and high inflation weighing on consumers.
“The worst quarter in two years isn’t so bad as the S&P 500 index is roughly 5% away from record highs,” said Moya. “A choppy stock market seems likely as no clear answers will be had on when peak inflation happens and how aggressive the Fed will be with tightening until geopolitical risks are resolved.”
Looking into the second quarter, the war in Ukraine will remain the dominant theme. But the focus will shift toward how the Federal Reserve fights inflation, with markets not ruling out two 50-basis-point hikes in May and June.
“US personal spending, income, jobs and inflation data all point to a vibrant economy that needs monetary policy to become far more restrictive to get price pressures under control. Combined with recent Federal Reserve official comments, this leaves us with the impression if the Fed doesn’t hike by 50bp at the May FOMC meeting, they never will,” said ING chief international economist James Knightley.
In the meantime, markets are closely monitoring the FOMC March meeting minutes, which will be released on Wednesday.
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