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LAWRIE WILLIAMS: Q1 gold price gain highest for 1.5 years as equities underperform

After a slightly downbeat year when the gold price failed to get back to its August 2020 high point, Q1 2022 saw the best quarterly performance for the yellow metal since mid-2020.  This performance was aided initially by high inflation in the U.S. and globally, and then given a significant boost by the Russian invasion of Ukraine which led to perceived strong geopolitical instability.  

The Ukraine situation did see gold spike to around its all-time high point again – albeit only briefly.  Even so it ended the quarter around 6% higher than it was at the start of the year, but still down over 5% from its high point achieved in early March a few days after the start of the Russian attack.  By contrast the Dow Jones Industrial Average index is down around 5% year to date and the NASDAQ has fallen by an even greater 10%.

Initially the gold price was buoyed up by U.S. inflation increases which saw all measures of this data rise. The calculated annual Consumer Price Index (CPI) level came in up 7.9% year on year on its latest release date on March 10th and is widely anticipated to show a further increase at the next such announcement on April 12th.  The latest Personal Consumption Expenditure Index (PCE), which tends to track lower than the CPI and is the U.S. Fed’s preferred measure, came in a couple of days ago at 6.4%, up sharply from the previous month.

The third regularly released inflation index figure – the Producer Price Index (PPI) which measures the selling prices received by domestic producers for their output, rose by an even more worrying 10% year on year for February.  It too is expected to rise further when the March figures are announced on April 13th – all in all a pretty gloomy picture for U.S. inflation in the months to come.

What is perhaps even more worrying for the U.S. consumer is that not only are the latest figures drawing ever closer to double digits (already there in the PPI), but the latest figures were all calculated before the Russian invasion of Ukraine will have had any effect.

Why should a conflict that is happening thousands of miles from the continental U.S. have any effect on the economy you may ask?  The strict economic sanctions being imposed on Russia do have a strong impact on global and U.S. prices because Russia is a major exporter of commodities and grain and foodstuff-related products and Ukraine also for grains and sunflower products for world markets, including to the USA itself and if these are cut off due to sanctions or interrupted by military action, alternative supplies will need to be sourced and these will mostly cost more, thus driving up prices.  The U.S. is certainly not immune from global price trends.

Further, over the years, the politicians in power of all hues have tended to massage statistics to appear more favourable to their followers.  There is a U.S. website called shadowstats.com which calculates these statistics in the way they used to be compiled and these already suggest that on the basis of calculation methodology of the 1980s and 1990s, U.S. inflation is running at over 15% - a figure that probably is more familiar to today’s U.S. consumer than the current official CPI figures show.  (By the way shadowstats undertakes similar exercises on a range of other U.S. data, including unemployment, which it calculates at near 25% when the current official data puts it at around 4%.).  Lies, damned lies and statistics!

With the current yield curve moving into reverse this suggests that recession – or at the very least a period of stagflation – is on the near horizon.  Both tend to be positive for gold overall as investors move to try and protect their wealth such as it may be.  As things stand at the moment with inflation, due to the exit from the Covid-induced protective measures, and now also boosted by the direct and indirect effects of the Russian invasion of Ukraine, looking like it will get worse before it begins to get better, matters are seeming more and more gold positive. 

The additional fear may be that if the U.S. Fed recognises that inflation is unlikely to start coming down as it has predicted, it may become more and more aggressive, and raise interest rates faster and higher than currently planned.  This could accelerate the possible onset of recession.  That would be disastrous for general equities, although perhaps not so for gold as investors seek safety.  Fixed interest investments would also be badly hit as real interest rates become increasingly negative with inflation continuing to rise at a faster rate than the Fed’s interest rate adjustments.  Gold could suffer temporarily as individuals and funds struggle for liquidity, but in the medium term will recover far faster than equities.  History tells us that gold performs well overall in such times.  We thus suggest that you stay with any existing gold holdings and/ or buy some before it is too late.

02 Apr 2022 | Categories: Gold, Russia, US, FOMC

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