Welcome to SurvivalBlog’s Precious Metals Month in Review, where we take a look at “the month that was” in precious metals. Each month, we cover gold’s performance, and the factors that affected gold prices.
What Did Gold Do in March?
Volatility was the theme for March, as sanctions against Russia and disruptions in food and fuel supplies caused by the war rocked global economies. Sanctions imposed on Russia had the effect of pressuring the economies of the sanctioning countries as well.
Western sanctions on Russia for its invasion of Ukraine sent safe-haven assets higher early in the month. Gold traded over $2,000 in Europe on Monday the 7th, with oil selling for more than $130 a barrel.
A short round of peace talks between Ukraine and Russia fell through in mid-March, but not before gold lost $98 over eight sessions, bottoming out at $1,895 on March 16th.
Gold rose to above $2,000 an ounce after peace talks broke down and inflation scares grew. They briefly fell below $1,900 again as a new round of peace talks began, but recovered as recession fears climbed at the end of the month.
Factors Affecting Gold This Month
Heightened market concerns that the Fed would be aggressive in hiking interest rates were temporarily overshadowed as the economic fallout from the Ukrainian War took center stage in March.
UKRAINE
Russia’s invasion of Ukraine was met by the strongest and most wide-ranging series of economic sanctions seen since WWII. The combination of war and sanctions has resulted not only in shortages of oil, natural gas, and coal, but also of basic foodstuffs. Both Russia and Ukraine are major wheat exporters. This will result in energy and food prices rising even faster than before the war.
Higher prices for essentials and the banning of trade with Russia will hit Europe especially hard. Not only does the EU rely on Russia for oil and natural gas, but Russia is a major trading partner. The US is largely insulated against major economic hits from sanctions on Russia. We only imported around 4% of our oil from Russia before banning it, and do much less trade with Russia than the EU does.
That isn’t to say that there haven’t been repercussions for US companies. Many banks and financial institutions are among the companies feeling major pain from the sanctions. Oil companies are walking away from billions of dollars of investments in Russia, with no chance of recovering their money. Automakers and consumer goods companies are also suffering major losses from closing their Russian operations.
INFLATION
Already high prices for oil, natural gas, coal, industrial metals, and food only got worse when sanctions were levied against Russia (one of the reasons Russia didn’t think the EU would do it). With inflation at 30-year highs across most of the world, the shortages of vital goods, especially food, is going to make lives worse.
Increasingly higher prices are also going to slow down economic growth in a world that was recovering nicely from the COVID pandemic. Will the danger of choking off economic growth force central banks to slow down their planned rate hikes, or is spiraling inflation a greater threat?
STAGFLATION?
The yield spread between the 5-year Treasury and 30-year Treasury notes inverted for the first time since 2006 late this month. This is a traditional signal of an impending recession. The more important spread between the 2-year and 10-year notes briefly inverted on the 29th, while the 5-30 spread remained inverted through the end of March.
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Companies abandoning billions of dollars in investments in Russia is going to crush performance for months, and drag down growth even more than was expected as recently as February.
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COVID is getting one last swing at cutting economic growth, as China’s lockdown of Shanghai is causing “parts pain” for US manufacturers, especially automakers who were just starting to get over a microchip shortage.
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At the same time these recessionary pressures are building, inflation in the US and across the world continue to rise from 30-year highs.
Central Banks
The Fed is aware of the stagflation tightrope it’s being forced to walk. It bumped its inflation forecast for 2022 to 4.1% from 2.7%, and reduced its estimate of 2022 GDP from 4% to 2.8%. This forecast was issued in the shadow of wholesale price inflation in the US being reported at 10%.
More Fed officials are getting on board with aggressive rate hikes now, to choke off high inflation while growth in the US economy is still positive. No one wants a repeat of the Volcker years, where the Fed was forced to double interest rates from 10% to 20% in two years to tame runaway inflation from the LBJ and Nixon years.
This is being reflected by numerous Fed officials backing a policy of hiking rates aggressively now to stop inflation before it gets too high. Better some pain now rather than a huge amount of pain later.
Cleveland Fed President Loretta Mester stated this month that higher oil prices risk pushing inflation higher for longer, meaning that interest rates may need to move above long-run neutral to get inflation under control.
Former dove St. Louis Fed president James Bullard is calling for the Fed to hike interest rates to 3% by the end of the year. That would take four 50 bp hikes and two 25 bp hikes by the end of the year. Bullard maintains that the danger of runaway inflation is greater than pushing the US economy into recession. He also says that balance sheet reduction should have started this month.
Saying that “inflation is raging,” Fed governor Chris Waller believes that the Fed will need to hike interest rates by 50 bp at least once this year. He said he only voted for a 25 bp hike this month because of the uncertainty of the effect of the war in Ukraine on the US economy. He also urged balance sheet reduction, saying it needs to start in June at the latest.
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The ECB is going to have a far more difficult time than the Fed re: energy cost-driven inflation. The month wrapped up with economists across Europe chastising the ECB for not raising rates yet, warning that extreme rate hikes will be necessary later if they don’t hike rates now. (This is the reason the Fed is so hawkish on interest rates.) S&P Global Economics forecasts the ECB to start hiking rates by 25bp per quarter in December, aiming for 1.5% by the middle of 2024.
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The Bank of England raised interest rates 25 basis points this month, for the third hike in a row. Inflation in the UK is still running at 30-year highs. The BoE expects inflation to hit 8% by mid-year. Inflation in March jumped from 5.5% to 6.2%.
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The Bank of Canada raised rates again to fight runaway inflation, vowing to “act forcefully” with “unwavering commitment” on bringing inflation back to 2%, including selling down balance sheet “quantitative tightening” if necessary. The statement is fueling speculation of a 50bp rate hike at the next meeting in April.
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The Russian central bank kept interest rates at 20%, after doubling them to fight the meltdown of the ruble. The ruble hit an all-time low of 158 to the dollar in early March. In the accompanying statement, the bank said that it did not expect interest rates to return to its target 4% for the next two years.
Central Bank Gold Purchases
This month’s World Gold Council central bank gold report covers January 2022. Turkey was the big buyer to start the new year, adding 10.4 tons of gold to reserves. Argentina bought 7 tons of gold to replace the 7 tons they sold in December. Similarly, Russia sold the 3.1 tons of gold they purchased in December.
The ECB purchased a half-ton of gold in its fifth consecutive month of minor gold purchases. Ireland bought a half-ton of gold as well, continuing an announced policy of adding small amounts of gold to its central bank reserves on a monthly basis. India bought 1.3 tons of gold to preserve a buying streak that stretches back to last May, though this was by far the smallest purchase during that time.
Kazakhstan was the big seller among central banks this month, dumping 17.1 tons of gold on the market. Mongolia was also a seller, with outflows of 1.3 tons. Other sellers were Uzbekistan (-1.2 tons) and surprisingly, Poland (-2.2 tons). The Polish government previously announced a policy of increasing central bank gold reserves.
Gold ETFs
Globally, gold ETFs saw 35.3 tons of inflows in February ($2.1 billion), concentrated in the US and Europe. This represented a 1% increase in assets under management for the world as a whole.
North American gold ETFs had inflow of 21.3 tons for the month, which was matched by an increase in European gold ETF holdings of 21.4 tons. Asian gold ETFs saw outflows of 7.4 tons. The Asian outflows were concentrated in China, as holders took profits on the price surge in gold.
On The Retail Front
The silver shortage continues to strangle production of the American Silver Eagle at the US Mint. Only a little more than one million ASEs were sold in March. Bullion shortages in gold don’t seem as bad, as 135,000 ounces of American Gold Eagles and 53,500 ounces of American Gold Buffalo coins were sold.
The global silver shortage is pushing premiums on investment silver products higher. This is due to higher prices being charged at refiners, as well as retailers being forced to offer higher prices to sellers on the secondary market.
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Patrick Heller at Numismatic News explains why the U.S. Mint can’t source enough silver to make enough American Silver Eagles to meet demand. The Mint is restricted by law to not pay more than the London Fix price for that day. Since silver prices have been trending higher, the spot price is often higher than the London Silver Fix price, locking the Mint out of the silver market. It’s gotten so bad that the Mint has canceled plans for striking 2022 Morgan and Peace silver dollars.
– Steven Cochran of Gainesville Coins