March 2022

Inflation, interest rate concerns, and then war were the major factors affecting gold, silver, and other financial assets during the first quarter of this year.

The year started with markets fixated on high inflation. That naturally led markets to begin focusing on prospects, long foretold by the Federal Reserve Board, the Bank of England, the European Central Bank, and others, of approaching shifts in monetary policy toward being less accommodative and raising interest rates.

All of that then was set aside, at least for a time, by the advent and start of Russia’s war against Ukraine. They are still central to gold and other financial assets, and the increase in U.S. and U.K. interest rates last week had important effects on gold and other asset prices.

CPM Group has written a lot in these reports over the first quarter about these three topics, reflecting their dominance in setting the tone and direction of gold prices.

For their part, gold prices started the first quarter showing modest strength in January, rose roughly $300 after a $75 sell off to a record high price of $2,078.80 in early March, and then sold off again even as the Russian invasion of Ukraine commanded the world’s attention.

Silver showed much greater strength and price volatility in January, then rose in line with gold during February into March, and sold off along with gold and other commodities after an 8 March peak. Unlike gold, daily silver prices did not come anywhere near their daily record highs.

The Second Quarter

Looking ahead to the second quarter, these three variables seem most likely to dominate the gold market’s attention and price direction over the next three months.

The key factor will be the Russian invasion of Ukraine. If some ceasefire emerges over the next week or so, gold prices might come off sharply, possibly dropping to their end-January lows briefly.

Frankly, a ceasefire would only be temporary, and any long-term or ‘semi-permanent’ resolution seems far away at this time. Meanwhile, the potential that NATO and the U.S. military intervene as they did late in the Serbian war against Bosnians in the 1990s, gold probably would be most likely to rise higher once more.

The most likely scenario might be a protracted war of attrition with Russian ground forces effectively bogged down by the Ukrainian military while Russia continues to target civilian targets with bombs and missiles. That would support gold prices, but not necessarily drive them sharply higher in any protracted way.

The next most important factor for the gold market during the second quarter seems likely to be interest rates, including rate increases in the United States and other industrialized countries.

The potential for a more aggressive official response to inflation elevates this as a factor going forward, evidenced by the Fed’s announcement that it might raise interest rates another six times in the next nine months for a total increase of 1.75% coupled with the Bank of England’s third interest rate hike last week, taking its benchmark rate back to pre-pandemic levels.

That said, the Bank of England and others have signaled that the increased economic uncertainty brought on by the Russian invasion of Ukraine may cause them to take a more cautious approach, paying close attention to economic fall out from the war.

Even with the more aggressive monetary policies, interest rates do not seem likely to reach such levels as to discourage investors from holding gold or stimulate any broad rotation away from gold to interest bearing assets. Real, inflation-adjusted interest rates will remain negative for some time. In the past it has taken real rates above 3% on Treasuries to encourage investors to abandon gold.

Given the massive array of political, military, economic, and financial market problems, investors seem most likely to remain positive toward gold in the second quarter, and beyond.

The third horseman in the sky is inflation. Inflation rates already have risen further and stayed high longer than many market participants anticipated.

CPM still expects reported inflation rates to decline over the course of 2022, mostly in the second and fourth quarters, if for no reason other than basic arithmetic. Percent changes in price levels will be measured for 2022 compared to 2021, when prices already had risen. Last year price levels were measured against recession and pandemic depressed 2020 prices. That will not be the case this year.

Offsetting such basic arithmetic will be the effects of the Russian war against Ukraine and the sanctions being imposed on Russia. As of the middle of March western sanctions have been designed to minimize the negative economic and inflationary consequences for Europe and North America. That may well continue, but the risk premium that has been added to oil and gas prices may be slow to dissipate. Saudi Arabia’s Aramco announced Sunday that it was going to ‘ramp up’ production, but the increases may be slow to materialize.

These three variables: The Russian invasion of Ukraine, interest rate increases, and trends in inflation, appear likely to remain the key focal points for the gold market during the second quarter. Each of them seem more likely to stimulate continued investor demand for gold and thus higher prices.

Meanwhile, while markets have focused on the inflationary consequences of past monetary accommodations, the markets seemingly have ignored the perhaps even greater inflationary pressures deriving from even more accommodative fiscal stimulus programs over the past several years. These may come to the fore, perhaps not until the third quarter, however.