Gold’s April 2022 performance

Gold’s April 2022 performance!

Despite equities and bonds falling amid spiking volatility, gold fell slightly in April as rates and the US dollar shot higher. Inflows into gold ETFs totalled 39t (US$2.5bn) in April, less than 2% away from all-time tonnage highs, while US Mint coin sales were lower than the incredible growth of Q1. US dollar strength and higher yields are generally headwinds for gold, but their movements could be overdone. Central bank monetary policy, in particular, along with inflation and geopolitics will impact gold in Q2.

Throughout April, gold remained among the best performing assets in 2022 up 5% in US dollar terms, yet it ended the month 1.6% lower at US$1,911/oz. April was marked by significant weak-ness across most assets, including equities and bonds, as well as heightened market volatility.

US dollar strength has been a detriment to the gold price in recent months. Although less persis-tent than in recent years, there is often a negative correlation between a stronger dollar and the gold price. It has been nearly two decades since the dollar index (DXY) has held above 100 for more than a few months, and the trade-weighted nominal US dollar index is near all-time highs, just shy of the brief period during the initial stages of the pandemic when it shot higher. Given the challenges from rising rates and a strong dollar, the fact that gold was only slightly lower on the month is compelling.

Some of the drivers behind dollar strength could create a headwind for gold. A strong dollar can create a headwind for the price of gold as evidenced by its historical negative correlation. Howev-er, we believe that if the dollar remains strong, gold’s reaction could be influenced by the drivers behind the dollar rather than its direction alone.
If the dollar remains strong because of hawkish central banks and rising yields, the negative corre-lation would likely be negative for gold.

However, if the dollar’s driver is risk-off sentiment, espe-cially if the war in Ukraine were to extend and have broader implications, both the dollar and gold may move up as they commonly do in these types of environments. So, in our view, while interest rates will remain incredibly important, the dollar’s behaviour is also likely to be a key driver of gold behaviour in the coming months.

Higher rates could generate a rotation back towards bonds. As the world moves into a tightening or quantitative tightening cycle (QT), it worth highlighting the shift in the amount of negative nominal yielding debt. Nominal-yielding debt among developed markets peaked around US$18trn or 40% of total debt outstanding by the end of 2020. As yields started to rise, this number has come down to US$2.5trn or 13% of the total outstanding.

Central banks may allow debt to mature, something already happening in the US with US$95bn rolling off soon, and, in some cases, may sell the bonds they own, effectively taking money out of the system. This could be challenging for gold. But in a QT environment, we will likely see a rota-tion into sectors more driven by the economy and inflation, such as financial (bank) equities and commodities, including gold.

Non-existent yields on bonds over recent years has compelled investors to buy stocks, given the greater potential for yields offered by equity dividends. But the recent sell-off in bonds has made them more competitive and raised their appeal, as they can now earn a higher coupon on average than can equities.

Economic slowdowns, central bank activity, geopolitics and inflation will remain a focus in coming months. Inflation expectations hit a 41-year high last week, rising to 5.4% for 2023 and adding weight to the stagflation conversation, which is coming back into focus for many investors.

Just last week US GDP came in at -1.4% q-o-q, while earlier in April CPI was 8.5% y-o-y, and at the time of publication ISM PMI is reporting well below expectations – all signs we could be heading in that direction. Historically, gold has done well in stagflation environments.

While some countries like China and India are more dovish about their activity, the overall sense is that central banks may not be there to support markets with the ‘implied put’ that has been in place since the Global Financial Crisis (GFC), which may necessitate portfolio hedges like gold.

The Ukraine-Russia war appears to have little or no resolution in sight and continues to take a toll on the global economic recovery. Tensions have escalated over Russia’s supply of natural gas to Eu-rope, as seen in Poland and Bulgaria. Thus, we may continue to see supply shortages and price in-creases in the overall commodities market, which could positively impact the price of gold.