Global gold prices rose 8% in Q1; rate hikes a risk, but inflation, geopolitics remain key drivers – WGC

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Global gold prices rose 8% in the first three months of 2022, the best quarterly performance since Q2 2020, after rising a further 2% in March, as rapidly rising inflation and unexpected geopolitical risks more than offset the drag from higher nominal rates, the World Gold Council (WGC) said in its latest monthly report, adding that

Inflows into gold ETFs totalled 269t (US$17bn) in Q1, the highest quarterly total since Q3 2020, while Q1 US Mint gold coin sales hit the highest level since 1999, the report added.

The WGC said that sharp flattening of US Treasury curve with some sections of the curve inverting was an environment in which gold has historically outperformed. 

Gold prices ended the first quarter at US$1,942/oz – its best quarterly performance since Q2 2020. It was among the best performing assets amid significant weakness in both equity and bond markets.

In a period marked by economic uncertainty and increased volatility, gold proved a reliable source of diversification and wealth preservation, the WGC said, adding that the metal’s performance was

Gold’s Q1 performance was primarily driven by rapidly rising inflation, higher interest rates, and unexpected geopolitical risks.

The Gold Outlook 2022 outlined WGC’s expectation for the competing forces of higher, more persistent inflation and rising rates to be the biggest influences on gold’s performance. The Russia–Ukraine war added an additional layer to this, as investors sought high-quality safe havens like gold amid equity market volatility and compounding unanticipated inflation pressures, including record oil prices. 

Inflation, geopolitics

“With headline inflation rising in many countries, not least in the US and Europe, which had experienced tame inflation for decades, investors remained concerned by the outlook. Inflation expectations, captured in the ‘risk & uncertainty’ category and measured by US 10-year breakeven rates, rose by 30 basis points (bps) during the quarter, almost touching 3% – a new all-time high,” the report said.

This supported gold investment during the quarter, evidenced by US$17bn inflows into gold ETFs which are captured in the ‘momentum’ category. But gold also faced higher ‘opportunity costs’. The 10-year US Treasury yields rose by 100bps in Q1, as the Fed, among others, confirmed the hawkish shift to combat rapidly rising prices.

“The geopolitical situation remains an important driver for gold. A prolonged conflict in Ukraine will likely result in sustained investment demand. In contrast, a swift resolution, something which we all hope for, may see some tactical positions in gold unwind, but much like in 2020 we believe significant strategic positions will remain,” the WGC said.

“However, we believe that the opposing forces of inflation and rising rates will likely be the strongest influences on gold in Q2,” it said, adding that the post-COVID economic recovery and supply-side disruptions, which have been exacerbated by the Russia–Ukraine war, will likely keep inflation higher for longer. 

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