Gold in Q1: War, Rate Hikes and Inflation Push Precious Metals Higher

Jeff Clark | Apr 12th 2022, 5:42:32 pm

The headlines were big in Q1, all of which pushed precious metals higher. Our quarterly ITV report examines the performance of precious metals vs. other major asset classes during the first quarter of 2022, along with a watchlist of conditions that could propel them higher.

 The headlines were big in Q1, all of which pushed precious metals higher.

Our quarterly ITV report examines the performance of precious metals vs. other major asset classes during the first quarter of 2022, along with a watchlist of conditions that could propel them higher.

Precious Metals Lead Most Assets


Gold and its cousins responded to the Russian invasion of Ukraine, the ongoing rise in inflation, and even the Fed beginning an interest rate hike cycle

Crude oil was the big winner, its price spiking by over a third in the first three months of the year. Commodities, already impacted by supply chain issues, jumped higher still.

Gold ended the quarter 6.7% higher, while silver rose 7.5%. It was gold’s biggest quarterly gain since mid-2020. It seems clear investors sought the ultimate in safety as the various crises played out.

Palladium soared, while platinum nudged out a small gain. Bitcoin did not prove to be a safe haven asset some had insisted it would be, giving credence to the notion that it is more of a “risk-on” asset.

Equity indexes all finished lower, along with U.S. Treasuries, to the surprise of many mainstream investors. In fact, U.S. bonds logged their worst quarter in over 40 years.

The Q2 WatchList


A number of ongoing issues provide context for the quarters ahead.

 Geopolitical Conflicts. Gold spiked at Russia’s invasion of Ukraine, and has since given some of the “war premium” back. While we all hope for resolution of the armed conflict, gold served its purpose.

President Biden signed a $768 billion defense policy bill, a major increase in military spending, highlighting the fact that geopolitical conflicts remain unresolved.


Inflation. Rising prices hit consumers hard in Q1, in virtually every segment of society…

·      Gasoline prices, already high, spiked further from the war in Ukraine and the resulting sanctions. Some U.S. states are considering reducing gas taxes, offering rebates, and in the case of Chicago offering free gas and public transit cards.

·      With the jump in Covid cases in China, Shanghai has imposed strict lockdowns, further pressuring already strained global supply chains.

·      Reports show consumers are cutting costs on mainstay items, everything from toothpaste to baby formula, necessities normally resistant to price increases.

·      Wages, already in an uptrend due to worker competition, continue to climb. Some economists insist that rising wages imply even higher inflation.

·      Supply chains remain stressed, pushing some analysts to elevate the risk of stagflation. JPMorgan CEO Jamie Dimon says the war in Ukraine and the sanctions on Russia will “at a minimum slow the global economy, and it could easily get worse.”


I’ll also point out that the persistent rise in the CPI highlights the Fed’s misstatement from a year ago. 

And now the inflation bug-a-boo has forced the Fed to institute a new cycle of…


Interest Rate Hikes. The Fed added a quarter point to the funds rate on March 16. The debate now is how many more rate hikes the Fed will do. 

While banks and analysts have various predictions, the Fed’s predicament is real. On the one hand tightening could cool inflation, but on the other hand it could hamper growth and increase the odds of stagflation or recession.

Many view the Fed as “behind the curve,” so the likelihood of further rate hikes seems inevitable. Indeed, as Jamie Dimon stated, “high inflation will usher in an era of rising rates.”

A look at historical rate hike cycles gives insight into how gold has performed during these periods.

Perhaps to the surprise of some, gold has a tendency to rise during rate hike cycles. While it may seem counterintuitive, it’s a result of the circumstances that compel the Fed to raise rates in the first place.

I have to ask, though, how much can the Fed realistically raise rates? Debt service costs will naturally increase, which has some analysts saying the Fed will purposely remain behind the curve.


U.S. Dollar. I’d also be remiss to not point out the dollar’s growing vulnerability, highlighted by a warning from Goldman Sachs who says the dollar faces a number of risks, perhaps the biggest being the potential fallout from the sanctions on Russia. This could push some countries around the world to move away from the dollar, eroding its global dominance. They point out the dollar has similar challenges the British pound faced in the early 1900s. That Goldman released a research note on “de-dollarization” is a major sign that investors are taking those risks seriously. It also means that cross border investing will slow, probably dramatically.


U.S. Midterm Elections. While not until early November, it goes without saying that the US is experiencing elevated levels of partisan polarization, gridlock, and radicalization. Democrats have a minor advantage in the House and a thin majority in the Senate; since some voters are frustrated with President Biden’s handling of inflation and other issues, Republicans would be in a position to block any legislative move by winning one chamber. This will likely push Democrats to push big changes before the election, including social spending and perhaps higher taxes, the latter of which could hurt equities.

2022 Demands a Crisis Hedge


It’s hard to imagine a more ideal scenario for gold. Despite the recent increase in price…


·      The bedrock beliefs that formed the foundation of international economics have arguably broken down, the consequences of which are hard to predict. Significant damage has occurred, on top of the damage already inflicted by the pandemic.

·      Russia had $630 billion in reserves—then the US and its allies cut them in half. The ramifications of those actions are only just beginning. The adage that “money is just a government liability” is proving to be true.

·      Record high grain prices are reminiscent of the Arab Spring, which started as a direct result of food inflation. At a minimum the world is not out of the woods for higher food prices.

·      Debt and deficits remain at or above record levels. On top of that, the boost in tax revenue that many advanced economies got last year from higher stock prices is absent so far in 2022.


The need for a true safe haven asset is clear. With unresolved events encompassing much of the globe, it would not be surprising to see the gold price achieve new record highs this year.

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