May 2022

Gold prices have fallen sharply over the past four weeks, from around $2,002 on an intraday spike on 18 April to as low as $1,785 on 16 May. Gold fell further and sooner than CPM had expected.

Of course, gold was in good company. U.S. equities have dropped back to levels they have not visited since the first quarter of 2021, while bond prices across the board have sunk. Silver was in with this broad mix of financial assets that dropped sharply in the first two weeks of May.

These declines all have had the same origin. The independent variable driving asset prices sharply lower has been the much more forceful anti-inflation stance and actions by the U.S. Federal Reserve Board. The Fed’s Open Market Committee raised the fed fund’s rate 0.50% on 3 May, the largest increase since 2002. It also signalled further large increases if inflation rates do not show signs of moderating and announced the imminent start of its long-promised and anticipated unwinding of the massive bond portfolio on its balance sheet.

These moves pushed financial assets including gold and silver lower.

They also helped push the U.S. dollar higher.

There was a second independent factor at work behind the financial asset sell-off, albeit one that appears to have exerted less selling pressure on financial assets. That has been the progress in the Russian war against Ukraine. Russia has continued to struggle to take over Ukraine, in whole and now in part. It has suffered major losses in the battlefield, at sea, and in its global political, military, and economic standing. Ukraine has done well and has benefited from a strong unified support from around the world. NATO is strengthening, with Sweden and Finland accelerating their moves to join the military alliance to secure greater protection against Russian expansionism. Due to these developments the war premium that had been visible in gold and silver prices since late February has dissipated some.

While the course of the Russian invasion of Ukraine has been a factor, the main driver has been the increase in U.S. Treasury interest rates, market expectations of further increases to fight inflation, and market concerns that the Fed’s aggressive tightening could push the U.S. if not the world into a recession.The -1.4% contraction in U.S. real gross domestic product in the first quarter accentuated these concerns.

The chart above showing 10-Year Treasuries since January 2019 drives home the market concerns about rising interest rates: In just a few months interest rates have risen past where they stood in January 2019, pre-pandemic. However, contrasting that to the longer term view of 10-year Treasuries on the first page, one sees that even in the face of May’s increase in 10-Year Treasury interest rates they remain far below rates prior to 2012, and far below levels likely to throw the U.S. economy into a recession.

Other factors could trigger a recession, including the effects of the Russian invasion of Ukraine, but it does not seem likely that the Fed would be the culprit should a recession arrive in 2022 or 2023.

Adding to this view is the fact that inflation-adjusted interest rates have only now crossed into positive territory for the 10-Year rates and remain deep in negative territory for shorter term interest rates.

For these and other reasons, CPM feels that the recession concerns in financial markets are misplaced at this time.

Our expectation is that market confidence in the Fed’s ability to manage an anti-inflation campaign that does not derail economic growth will increase over the coming months.

Meanwhile inflation already is showing signs of peaking, which previous reports explained as primarily arithmetic based on the fact that 2022 inflation rates will be measured off of already high 2021 price levels. Price levels may not fall, but the rate of increase in prices is likely to decline over the next several months.

While CPM expects the Fed to manage to not throw the United States into a recession, we do see signs of a recession on the horizon. There remains a great deal of slack in the U.S. and world economies, however, so our expectation is that a recession may be held off until 2024 or 2025. Capacity utilization, labor market trends, housing and non-residential construction, room for business inventory expansion, easing of supply and delivery delays and obstructions, and the continuing construction and other expansionary effects of the fiscal largess of the past several years all suggests CPM that a recession may not be imminent.  

In this environment, gold and silver may not rise, but they may not fall significantly further as they move into the seasonally week summer months.