Coins & Money

World Gold Council Backs Off Timing of When to Buy Gold During Rising Rates & Inflation

There are multiple reasons that true gold bugs are really buying the shiny yellow metal. Some feel it acts as a hedge against inflation and a hedge against currency devaluation. Other gold bugs feel it is more trustworthy than Bitcoin and crypto. And others buy gold as the ultimate safety trade. At the end of the day, buyers are either looking for higher gold prices ahead or they are seeking a store of value. And we all know that gold is taxed as a collectible and that gold also falls within alternative assets.

In 2022, the world has dealt with an unwarranted invasion of the Ukraine by Russia, sanctions against Russia, high inflation, a slowing economy, and even more shutdowns in China over Covid variants all over again. And despite all that, Gold is up about 5% year-to-date while Bitcoin is struggling to remain flat.

The World Gold Council had previously issued its recommendations earlier in 2022 about when to buy gold — after the first interest rate hike by the Federal Reserve. This view has now been updated by the Gold Council based on an even more hawkish Federal Reserve and with the threat of war and inflation persisting and the timing now seems to be pushed back.

The updated outlook outlines geopolitical risks, rising rates and inflation:

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.

However, we believe that the opposing forces of inflation and rising rates will likely be the strongest influences on gold in Q2.

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.

In the end, all of this adds up to rekindled fears of stagflation, which the Council also sees as an environment in which historically been a good environment for gold. An inverted Treasury yield curve is also usually considered to act as a signal of an impending recession, which could also support gold investment. With rates still very low, this is also a climate that may drive higher investor allocations to alternative assets.

In the end, the World Gold Council seems to be delaying its “after the first rate hike” timing:

While our historical analysis shows that gold has typically performed well following the first rate hike in a tightening cycle, we believe gold may come under renewed pressure around the forthcoming Fed and ECB meetings.

Strong U.S. coin sales are helping to offset weak gold demand in China and India. China’s shutdowns in major cities for lockdown measures has weighed on local gold consumption in March. Retail demand remained sluggish and wholesale buying was muted during March in India. Data from the US Mint put March’s gold coin sales of American Eagle and Buffalo coins at $427 million (220,000 ounces) for total U.S. gold coin sales to over $1 billion (518,000 ounces) for all of Q1 — the second highest Q1 sales total in volume terms since 1999.

The price of gold was up 8% during the first quarter for its best quarterly performance since the second quarter of 2020. The Council sees rapidly rising inflation and unexpected geopolitical risks more than offset the drag from higher nominal rates. And the view that the U.S. Treasury yield curve has flattened sharply, and with some sections of the curve inverting (short rates higher than long-term rates).

More details and graphs can be found in the full April 6 report.