Gold in Q2: The Global Selloff

Jeff Clark | Jul 21st 2022, 4:44:25 pm

It was a rout. Other than oil and some commodities, virtually nothing was left unscathed last quarter. Our ITV report examines the performance of gold and other major asset classes during the second quarter of 2022, plus YTD. We also look at the conditions that could impact precious metals in the second half of the year.

It was a rout. Other than oil and some commodities, virtually nothing was left unscathed last quarter.

Our ITV report examines the performance of gold and other major asset classes during the second quarter of 2022, plus YTD. We also look at the conditions that could impact precious metals in the second half of the year.

Q2: “Sell Everything!”

In what amounted to a selloff in most investment assets, only the US Dollar and some commodities rose last quarter.

Gold was down 6.4% in the three-month period, while silver lost 17.7%. Platinum and palladium fell hard, too.

The broad stock market took it on the chin. Uncertainty in global markets pushed the US dollar higher. The 10-year Treasury lost 4.8%, and Bitcoin crashed a whopping 56.6%.

Oil rose, along with a small gain in the commodity complex. However, we should point out that the metals group ended the quarter down significantly from their earlier highs—copper, for example, logged its worst quarterly performance in more than a decade.

Margin calls and a desire to move to cash meant the adage “there’s no place to hide” was largely true last quarter.

YTD: Gold Hangs Tough

The first half of 2022 was harsh to most investors. So far only oil and a commodity basket have logged gains.

Gold is flat on the year, though it ended the quarter at its one-year average.

Silver is down 11.6% YTD, with the gold/silver ratio (gold price divided by silver price) reaching 90, highlighting silver’s deep undervaluation relative to gold.

For equities, it was the worst first-half for the S&P 500 since 1970, and the Dow’s worst first-half since 1962. The Nasdaq logged its largest first-half drop ever. Bitcoin is down 57.3% YTD, with June its biggest monthly drop ever.

 Inflation and the USD moved stubbornly higher.

What Does 2H-2022 Bring?

 A number of hot issues are likely to impact the second half of the year.

Recession Watch: GDPNow for Q2 is predicted at -1.0%, while the Atlanta Fed projects US GDP at -2.1%. The definition of a recession is when gross domestic product contracts for two consecutive quarters, and it’s getting easier to see that happening. “Real” GDP fell at an annual rate of 1.6% in Q1.

Numerous economists have publicly stated they expect the US to enter a recession. “More likely than not” said Andrew Balls of PIMCO. “Uncomfortably possible,” said economist Mohamed El-Erian said. As a group, economists give a 50% chance of a recession within the next 12 months. Historically, gold has usually risen during recessions.

With the slowdown would come higher unemployment. Facebook warned employees to “brace for layoffs.”

This naturally raises a question. How long can the Fed continue to raise rates?

Rising Interest Rates: Fed Chair Jerome Powell stated interest rates would continue to rise until the central bank sees “clear proof that inflation is slowing.”

Powell admitted that elevated rates could lead to a recession. We’ll note that only 3 of the last 20 rate hikes did not end in recession. And while interest rates keep rising, the “real” rate (10-year Treasury minus inflation) remains starkly negative.

Stock Market Vulnerability: Goldman Sachs Group warned that the risk of a renewed selloff in equity markets is still high, as they believe investors are pricing in only a mild recession. One also has to wonder what earnings will look like in Q2.

Either way, would the Fed continue pushing rates higher if share prices keep falling? One reason for the drop in stocks is almost certainly due to investor fret over the Fed’s determination to tame inflation.

Stubborn Inflation: The CPI continued rising, hitting 8.6% last month, still 40-year highs. The Eurozone also registered 8.6% last month, its highest reading ever.

Higher consumer prices, including energy costs, has led some US states to mail relief checks to residents. Maine is sending $850 checks to residents… Kansas announced it would issue $250 rebate checks for qualifying residents… California is sending checks up to $1,050.

President Biden unfortunately didn’t help matters… when asked how long Americans should expect to pay high gasoline prices, he replied, “for as long as it takes.”

Real Estate Rollover: Higher mortgage rates are leading to early signs of a cooling housing market. US existing home sales sunk to a two-year low in May, though the median house price still rose 14.8% from a year earlier.

The jump in mortgage rates indeed appears to be cooling the market. The National Association of Home Builders said that not only has the cost of building a home risen, but predicted that mortgage lenders, refinancing companies and real-estate brokers will lay off thousands of employees in the coming months.

Debt and Deficit Spending: As the Wall Street Journal wrote, higher interest rates and quantitative tightening “will increase the volume and cost of federal government borrowing, slamming the federal budget and exposing the consequences of decades of deficit spending.” And if the economy does contract, the Fed will have limited capacity to spur a recovery with fiscal stimulus.

Meanwhile, the Fed’s reduction in its asset portfolio is going slower than it projected. June saw a $1.5B reduction, far short of the $67B per month they need to reach their stated goal.

US Elections: It’s a midterm election year, with the country as divided as ever. For what it’s worth, the Stock Trader’s Almanac reported that since 1946, the second year of a new Democratic president has ended with the S&P 500 losing an average of 2.3%.

Crypto Weakness: The Bank of America reported that customers transacting in crypto has shrunk by 50%. Meanwhile, Bloomberg noted $4 billion has been loaned to crypto miners, secured against the mining rigs as collateral. Securitize Capital said this could lead to a shakeout, as leveraged players need Bitcoin prices greater than $20,000 to cover infrastructure and interest rates.

The need for a safe haven asset is clear. With unresolved issues 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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