eBusiness Weekly
Gold’s status as a safe haven and a hedge against inflation provided support in 2022 as the yellow metal battled headwinds from a strong US dollar and the US Federal Reserve’s attack on inflation.
On course to shed 1,6 percent for the year, gold was unable to retain gains made in the first quarter, when a price spike following Russia’s invasion of Ukraine sent the precious metal to a 19 month high of US$2,053 an ounce. The March surge was a 13 percent increase from January’s start value, but was short-lived as gold returned to the US$1,939 level by the end of Q1.
The second quarter of the year saw further consolidation as gold slipped to US$1,811, while market volatility sent the Dow Jones Industrial Average (INDEXDJX:.DJI) and the tech-heavy NASDAQ Composite (INDEXNASDAQ:.IXIC) into bear market territory.
By Q3, seasonal weakness paired with a surging US dollar had forced gold to a 30 month low of US$1,691.
Gold price in Q1: Russia-Ukraine war adds early tailwinds
As economies around the world continued to recover from the pandemic in early 2022, Russia’s attack on Ukraine created global uncertainty, which worked in gold’s favour during the first quarter of the year.
Philip Newman, managing director at Metals Focus, explained that gold’s performance in 2022 was the result of two major factors.
“Obviously, the first one is the war, where we saw prices spike for a range of precious metals. You had that flight to safe havens that obviously dominated everything as you would expect . . . then dissipated.”
As the gold price stabilised after the initial shock, long-term drivers began to emerge.
“What came to the fore, and is still the most important, is really the macro backdrop, and drilling down further, the actions and expectations of the Fed,” explained Newman.
Interestingly, although the war had a transitory effect on the gold price, production felt a deeper impact.
“Russia’s invasion of Ukraine and the subsequent sanctions have meant that miners operating in Russia have had issues getting financing and equipment from western sources,” said Adam Webb, director of mine supply at Metals Focus.
Higher overhead costs related to energy and transport are also weighing on gold miners globally and in the Russian region. “This has impeded Russian gold production, and we expect a 30 tonne (9 percent) year-on-year drop in output this year,” he said.
The decline in supply out of Russia will be offset by a significant rise in output from another region.
“We expect global mined gold production to rise by 1 percent year-on-year,” Webb said.
“The biggest contributor to this will be a rise in output from China, which we forecast to increase by 39 tonnes year-on-year, surpassing the fall in Russian production.”
The uptick in Chinese supply stems from a recovery in production following safety work stoppages in 2021.
Gold price in Q2: Inflation hedge status kicks in
In June, US inflation reached a four decade high of 9.1 percent as gold began its H2 descent below US$1,800.
Gold’s weakness in the face of inflation prompted some market participants to question its value as a hedge. But other experts said the yellow metal was doing its job.
“Actually, gold has performed much better than many of the traditional inflation hedges that investors hold,” said Juan Carlos Artigas, global head of research at the World Gold Council (WGC).
While gold is impacted by higher opportunity costs, Artigas said it has largely maintained its value in the face of rampant inflation.
“Gold has outperformed TIPS (Treasury inflation-protected securities) and, more generally, global inflation-linked bonds, because higher opportunity costs are not something that is impacting only the gold market.”
For Joe Cavatoni, chief market strategist of the Americas at the WGC, gold’s inflationary hedge upside is still to be seen.
“Nobody hedges inflation for three weeks; nobody hedges inflation for three months,” he said. “They hedge inflation long term … and it’s the right way to think about why gold fits in your portfolio as a strategic hedge.”
By early November, the Fed had implemented its fourth 75 basis point rate hike and sixth consecutive increase, pushing the federal funds rate to 3.75 to 4 percent, a 14 year high.
This environment has made gold’s ability to hedge particularly alluring for investors.
“We have had a year where investors have had to manage risk, whether it is coming from high inflation or from geopolitics; combined (those) have supported demand for gold,” Artigas said.
By mid-November, the Fed’s inflation targeting blitz had seen some success, with the consumer price index rising 7.7 percent year-on-year in October, the smallest 12 month increase since January.
As Newman explained, the better-than-expected annual inflation numbers resulted in optimism that the Fed may be able to slow its course or even pivot sooner than expected.
“You also saw a bit of a short-covering rally; we saw that in gold, and silver for that matter,” he said. “From our point of view, that felt perhaps a little bit overdone. And we saw that when prices came off fairly quickly thereafter.”
Gold price in Q3 and Q4: Bar and coin demand takes flight
Gold’s more than two year price low in Q3 came as output hit a year-to-date high, a factor Webb associated with seasonality.
“Q3 is traditionally a strong month for production as mining and processing is not impacted by cold weather at operations located in Russia, China, Canada and the US,” he said. “It also falls outside of the wet season in other gold-producing countries.”
For the three month period, mine production rose to nearly 950 metric tons, a 2 percent year-over-year move.
Even though miners have benefited from these mild conditions, the effects of inflation have been inescapable.
“Inflation is pushing costs up for miners and reducing margins,” Webb explained. “The average all-in sustaining cost reached a record high of US$1,289 per ounce in Q2, and this is likely to rise again in Q3. Meanwhile, higher interest rates are making debt financing for projects and expansion more expensive.”
In terms of demand, the September quarter saw a 28 percent year-over-year improvement despite a steep decline in investment demand. Although bar and coin purchases continued to gain strength, rising 36 percent, exchange-traded funds (ETFs) grappled with more outflows. The discrepancy highlights the differences in the two segments, explained Newman.
“The gold ETF space really is dominated by larger investors, not necessarily retail,” he said, pointing out that these investors are motivated by Fed expectations and real yields. “I think you’ve seen liquidations of ETFs, which is in broad measure echoing some of the activity you see on the (Chicago Mercantile Exchange).”
On the flip side, demand for bars and coins has already surpassed 880 metric tons for 2022, the highest level since 2013. Newman attributed the steady increase in bar and coin demand to retail investors responding to inflation.
“But from an institutional point of view, because rates have been so low, that rising inflation signals to them that all the rates are going to continue to rise,” he explained. “That’s why you see (institutional investors) taking a negative view of gold, whereas retail investors tend to react in a more traditional sense to inflation, and are therefore buying gold as a hedge against inflation.”
By December 6, the price of gold was holding above US$1,750 at US$1,771. – https://investingnews.com/
