Balancing inflation, rate hikes and political uncertainty
Investors face a challenging environment during the second half of 2022, needing to navigate rising interest rates, high inflation and resurfacing geopolitical risks. In the near term, gold will likely remain reactive to real rates, driven by the speed at which global central banks tighten monetary policy in an effort to control inflation.
Yet, in our view:
• Rate hikes may create headwinds for gold, but many of these hawkish policy expectations are priced in.
• Concurrently, continued inflation and geopolitical risks will likely sustain demand for gold as a hedge.
• Underperformance of stocks and bonds in a potential stagflationary environment may also be positive for gold.
Higher rates in 2022 outweighed inflation risks
Gold finished H1 0.6% higher, closing at US$1,817/oz.[1] The gold price initially rallied as the Ukraine war unfolded and investors sought high quality, liquid hedges amidst increased geopolitical uncertainty. But gold gave back some of those early gains as investors shifted their focus to monetary policy and higher bond yields. By mid-May, the gold price had stabilised in response to the tug of war between rising interest rates and a high-risk environment. The latter was a combination of persistently high inflation as well as likely support also from the extended conflict in Ukraine and its potential knock-off effects on global growth.
This was also reflected in both COMEX net long positioning and gold ETF flows. The latter saw strong investment early in the year before giving back some gains in May and June. Yet, by the end of June, gold ETFs had amassed US$15.3bn (242 tonnes) of inflows year-to-date.
Our Gold Return Attribution Model (GRAM) corroborates this. Rising opportunity costs – both from higher rates and a stronger dollar – were key headwinds to gold’s performance y-t-d, while rising risks – from inflation as well as geopolitics – pushed gold higher for much of the period.
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Footnotes
[1] Based on the LBMA Gold Price PM as of 30 June 2022.