Gold News

Market Crisis 2022: Gold Escapes $1 Trillion Crash (So Far)

Gold prices and investing defy surging interest rates...
SO the QUESTION of whether 'crypto currencies' offer a safe haven from stock market losses and inflation has been resolved, writes Adrian Ash at BullionVault in analysis first shared with readers of the free gold-market Weekly Update email.
The crypto sector as a whole is sinking below $1 trillion in market-cap value...
...down by two-thirds from November's peak...
...and Bitcoin prices have this week hit fresh 18-month lows.
That's where global stock markets also look like they're headed if this morning's bounce – the first rally in 7 sessions – doesn't extend from Asia and Europe into New York trade.
So far, so funny if you don't own any stocks or crypto. Or bonds. Or property. Or a retirement fund. Or a job.
But what about gold? Hasn't it also failed to deliver?
Inflation is racing to 4-decade highs and the stock market is sinking.
Yet gold prices haven't made a new high since March in Euros or Sterling...
...and the Dollar peak of mid-2020's Covid Crisis remains over $200 away.
Chart from Gold Focus 2022. Source: Metals Focus
Offering this set of forecasts last Wednesday, "You could write your own headline from a choice of three," said Neil Meader of specialist analysts Metals Focus, launching the consultancy's new Gold Focus 2022 report.
"Annual average gold prices are predicted to rise 2% to a new all-time nominal high in Dollar terms. Or gold will retreat to $1670. Or the gold price will decline 9% intra-year, but still outperform other assets."
To repeat: "Even under our cautious outlook, we think gold will outperform most asset classes in 2022."
Okay, so outperforming other assets might seem a low bar right now.
The MSCI World Index of global stock markets is currently 16% down from this time last year. Bond investors have meantime lost more than 17% of their money.
And both those slumps come BEFORE you account for inflation, now running at 8% and worse across the US, Europe and UK.
To try and fix this cost-of-living crisis, Western central banks are finally moving to raise interest rates and also to stop creating trillions in new money for buying bonds.
That, therefore, means they will stop trying to push up bond prices. Well, outside Japan at least. The central bank in Tokyo looks determined to keep fighting the tape, creating Yen to throw at buying 10-year Japanese government bonds, thereby squashing the interest rate offered to longer-term investors on longer-term debt, and thereby keeping a lid near 0% on Tokyo's longer-term borrowing costs.
But the Bank of Japan's contra-trend QE only confuses the global picture. Because everywhere else, unwinding the weirdness of QE – and never mind trying to shake off negative short-term interest rates in the Eurozone – is spooking the bond market. Badly.
Yields offered to new buyers have leapt. Because heavy selling has sunk the price.
Chart of 10-year government bond yields for Germany (orange), US (blue), UK (red) and Italy (green)
Yes, higher interest rates seem the obvious solution to runaway inflation.
That's what it took to kill inflation at the start of the 1980s, for instance.
But pretty much everyone thinks that raising rates risks pushing the economy into recession. Which is both a) exactly what happened at the start of the 1980s, and b) exactly the scenario in which central banks will need to cut interest rates again, maybe in the medium-term if not near future.
Confused yet? The bond market is. Already this week, it has given its second "Recession!" warning of 2022 so far, with the gap between 10-year and 2-year US Treasury yields flipping below zero in a repeat of March's big headline news.
Once again here in June however, this signal...
...which has preceded every US recession in modern times (as marked by the gray bars below)... getting a big thumbs down from the other key 'yield curve' spread that analysts and traders like to track when looking for recession warnings...
Chart of 10-2 and 10-3 yield spread on US Treasury debt. Source: St.Louis Fed
...with the gap between 10-year and 3-month Treasury rates continuing to defy that inversion and pointing higher instead.
What to think, never mind do?
The value of your shares and bonds is sinking (alongside crypto) even as housing and real estate turn south thanks to the cost of borrowing going up.
Cash in the bank, however, still pays 7 percentage points less than inflation. And yet gold hasn't jumped.
What's up with that?
"In a world of steady interest-rate rises and balance-sheet reduction by central banks," Meader went on in launching Metals Focus' new report in the City last week, "it's very difficult to see how gold soars ahead, especially if inflation comes off the boil."
Gold, in other words, tends to thrive when borrowing is cheap and the supply of money and debt is surging. Tighter central-bank policy sounds like the opposite.
Against that however, and lending strong support to gold prices, "Institutional investors are in no rush to sell," Meader said.
And without a rush for the exits from big-money investors, "the downside for gold will be limited..."
...meaning we shouldn't expect a repeat of spring 2013's awful $1 trillion crash.
Chart of speculative positioning in gold (global gold ETF holdings plus US derivatives net long). Source: BullionVault
First, that's because the big money really matters to the direction of gold prices.
It matters way more than coin and small-bar demand or even central-bank buying, never mind jewelry purchases.
You can see this on our chart above. It shows – and lacking the unknowable weight of 'over the counter' investment directly into physical, vaulted bullion – the sum total of gold ETF holdings plus the notional weight of net speculative bullish bets on Comex gold futures and options. Together, they track the Dollar gold price very, very closely over time.
So second, and peering ahead, central banks finally ending QE and raising interest rates won't make gold a screaming sell. Because of how awful everything else looks.
Raising interest rates won't, for example, fix the supply crunch in energy, supply chains and labour markets which is driving inflation higher.
Instead, it risks hitting economic growth just as badly as the soaring cost of living...
...resulting in the dread 1970s' landscape of stagflation.
Nor will tighter central-bank policy fix Russia's murderous invasion of Ukraine. Or China's latest sword-waving over Taiwan. Or the fast-darkening outlook for global equity and property markets more broadly.
Gold, in other words, and despite the pressure on prices from interest rates going higher, is likely to retain its safe-haven appeal for big-money investors. And they have lots to seek protection from.
Remember the Eurozone debt crisis, for instance? With the European Central Bank now set to end its QE money-creation and bond-buying from 1st July, what are the odds it makes a return as a worry if not a fact?
Italy is the 19-nation currency zone's biggest debtor. It's now paying an extra 2.4 percentage points per year to borrow for the next 10 years than Germany is.
And that spread could get a lot wider a lot faster if bond investors suddenly panic that, this time...
...and unlike every previous time since the 2010 debt crisis took hold...
...the ECB really won't step in with new QE bond buying to push up Italy's bond prices and pull its borrowing costs back down, more in line with Germany's.
"Gonna need a new bazooka full of fresh bond-buying cash," said one pundit on Tuesday.
"Gonna hold an emergency meeting today," said the European Central Bank on Wednesday morning.
Chart of Italy's 10-year BTP yield spread over comparable German Bunds' rates. Source: Il Sole 24 Oro
All this still leaves us with the trillion-dollar question:
Will gold, bought and held as a 'safe haven' by institutional as well as private investors like you and me, actually perform as hoped?
Prices start today at pretty much the most expensive in history. So no-one should think they are grabbing a bargain.
Investment levels are also very strong (a truism, in fact, with the level of prices). So no-one should think gold offers the kind of unloved, contrary investment it offered in 2001 or 2015.
Instead, and accepting that beating other assets is a low hurdle right now, gold has done well time and again over the last half-century when other things have done badly for an extended stretch...
...helping to offset losses on other, usually more profitable assets...
...and really catching fire when people lose confidence in central banks and their policies.
The past is no guarantee of the future, of course.
But the past is pretty much the only model any investor will want to check as the risks, threats and financial losses of 2022 build towards what looks like becoming a historic crisis.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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