Gold is 2022’s ‘store’ of value

Friday 18 March 2022

In this week's market report:

• Safe haven demand ebbs

• Strong commodity prices push up the Australian dollar

• Fed sticks to the plan

• Real assets like gold maintain their value

Dear Investor,

US dollar gold price [XAUUSD]
Daily chart

Source: Trading View
(Click to enlarge)

Gold retreats from all-time high: Spot gold fell this week, down 2.68% to US$1,942 this morning. The Russia-Ukraine conflict continues; however, this was unable to provide support to last week’s 18-month high.

US Treasury yields rose this week: US Treasury yields jumped this week as the Federal Reserve Bank raised rates, further dampening the enthusiasm for precious metals. This is the first increase since 2018. More below.

Bank of England raises rates overnight: The BoE increased by 0.25% overnight to 0.75%. This is the first time the BoE has hiked rates at three consecutive meetings in over two decades.

Safe haven demand ebbs: Since the Russian invasion of Ukraine, holdings of gold-backed products have increased by 110 tonnes. Inflows into gold exchange-traded products (ETPs) appear to be softening for now.

Precious metals dip across the board: All precious metals have fallen in the past seven days, with Au, Ag, and Pd back to their 2nd March price levels. Pt has fallen to a two-month low.

• Silver is down 1.59% to US$25.37 for the week. There is a positive technical picture for silver forming, more below.

• Platinum dropped 5.31% to US$1,029.37.

• Palladium has fallen 14.19% this week as speculative trading has eased, down to US$2,516.18 per ounce.

Bulls, it may be a quiet week: There has been significant excitement in gold in the past two weeks. Trading this week may be more subdued. Without significant news flow, expect gold to bob along these levels.

Bears, Au may look for support: Gold’s reversal could see the yellow metal look for support around US$1,896 in the short term.

Silver bulls, the trend favours you: In the last few weeks, the technical price movements favour a strong upside for silver. Even with Ag’s dip this week, there is room for silver to run up to US$29 or even US$30 per ounce in the medium term.

Lookout for the downside: Silver needs to hold above US$22.50 per ounce. If this level is breached, it risks US$14 — a possible but extreme downside target.

Strong commodity prices push up the Australian dollar: Despite falling earlier in the week, the Australian dollar has rebounded, up 0.32% to 73.77 US cents for the week. Coupled with the fall in spot gold, the Australian gold price is down by 3% to AU$2,631. A rising Australian dollar and a falling spot gold price often presents the best opportunity for Australian investors to buy gold. Click here to learn more.

Fed sticks to the plan

The key question leading into the Federal Open Markets Committee (FOMC) meeting this week was will the Fed do what’s expected and raise the cash rate 25 basis points? Or will the Fed shock the market and increase rates by 50 basis points? The Fed has opted for a gentle lift-off, increasing the benchmark federal funds rate by 0.25%.

• Markets are now expecting the fed funds rate to be 1.25–1.50% in July 2022, though there is a 41.3% probability of a 1.50–1.75% rate in July.

• Overall, this tightening cycle may see the fed funds rate lift to 2.37–2.50%

Fed funds rate target probabilities comparison

Source: CME Group
(Click to enlarge)

Increasing concern about US inflation is weighing on the central bank, with Fed Chair Jerome Powell saying after the FOMC meeting:

‘As I looked around the table at today’s meeting, I saw a committee that’s acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that.’

During this meeting, Powell laid the groundwork for a 50 basis point increase later in the year. Adding policymakers may even need to deliberately stifle economic growth in the US.

London Metal Exchange in turmoil

The halt in nickel trading last week was unexpected. However, the subsequent actions of a week-long suspension and cancelled trades are seeing the credibility of the world’s oldest metals exchange being called into question.

• Trading resumed on Wednesday, only for trading to be halted within a minute of trading due to a technical glitch.

• The LME has introduced a limit of 5% daily price fluctuations on nickel contracts based on the previous day’s closing price.

Real assets like gold maintain their value

Visual Capitalist has put together a graphic that demonstrates how gold, oil, and grains have emerged as ‘2022’s store of value’, writing that ‘2022 started off with a slump for equity and cryptocurrency prices, but real assets like gold, crude oil, and agricultural commodities have more than held their dollar value.’ Click here to see the full image.

Source: Visual Capitalist Elements
(Click to enlarge)

Warm regards,

The ABC Bullion Team