The shocking closure of two US banks, the Fed slowing interest rate hikes, and a weakening US dollar all roiled markets and led to a spike in gold demand. 

Our ITV quarterly report summarizes how gold and silver and other major asset classes performed in the first quarter of an already volatile year. We then outline the major catalysts to watch as the rest of the year unfolds.

Gold Leads Most Assets

This chart shows how gold and all precious metals performed last quarter, along with most major asset classes.

Gold rose 9.2% last quarter. Silver was flat, while platinum and palladium fell 7.9% and 16.7% respectively. Gold outperformed the S&P 500, US Treasuries, real estate, and the US dollar. Bitcoin, not shown, rebounded 72.1%

The gold price rose for a 2^nd straight quarter. But even more noteworthy is this: 

·      Gold recorded its highest quarterly close, EVER.

The reasons for this are pretty clear: two U.S. regional banks nearly collapsed, causing fears of a widespread banking crisis… which in turn drove investors to bet the Fed might pause interest rate hikes… which in turn caused the USD to weaken. All of these were bullish for gold.

Now that Q1 is in the books, what can we expect going forward?

The Precious Metals Watchlist

There are numerous vulnerabilities that could continue to push investors into gold…

Banking Crisis: Is the banking crisis over? Deposits at small US banks dropped by a record amount after the collapse of SVB. The contagion spread to some large banks as well. The gold price soared when the SVB closure was announced.

Meanwhile, Credit Suisse was about to go bankrupt, but the Switzerland government stepped because it said the collapse would’ve affected their economy and financial center and likely resulted in runs at other banks. They brokered UBS taking over the Zurich bank, a surprising and landmark event.

Banking is at the core of commerce, so any continued threat here will drive investors to gold.

Fed Pivot? A full Fed pivot is simply the central bank shifting from raising interest rates to lowering them. Many analysts believe that process is likely in its first stage, since the Fed has decreased how much it’s raised rates.

While the jury is still out, I’ll point out that since the 1950s, the average time between the Fed’s last rate hike and the first rate cut is a mere 5 months. Some were as short as one month, the longest was 13 months. If the Fed stops raising rates this summer, for example, it is entirely possible we could see them begin to lower rates by the end of the year! A dovish Fed has major implications on investment markets, including bullish for gold.

Recession: The most accurate predictor of a recession is an inverted yield curve (10-year minus 2-year), and it is now more inverted than at any time in the last 23 years! The yield curve has also inverted in a whopping 26 countries. The gold price has risen during most recessions since the 1970s, the only two exceptions being single-digit declines.

Most consumers expect a recession. Consumer sentiment fell last quarter due to “concerns of an impending recession.”

De-dollarization trend: The list of countries making efforts to trade in their own currencies instead of the US dollar continues to grow. Saudi Arabia, China, Brazil, France, India and of course Russia have all made public efforts to avoid using US dollars. A weaker US dollar usually means a stronger gold price.

Inflation: While CPI readings in the US have come down, inflation is still far above the Fed’s 2% goal. It is not unreasonable to question the likelihood of them reaching that goal. History shows that high inflation is not only difficult to bring down, but that it can spike again before ultimately subsiding.

Meanwhile, the EU reported that core CPI hit a new record high last month.

Real Estate: Housing prices and demand continue to fall, with Morgan Stanley saying housing affordability in the US is “deteriorating at its fastest pace in history.” Globally, interest rate hikes are outpacing the fall in home prices, making affordability worse.

A crisis in commercial real estate is also looming. Morgan Stanley says, “Commercial real estate, already facing headwinds from a shift to hybrid/remote work, has to refinance more than half of its mortgage debt in the next two years.” The point being, they can’t afford it with higher rates in place. This is something to watch.

Stock Market: Stocks remain vulnerable with the elevated risk of recession, elevated interest rates, and elevated inflation. Gold is typically inversely correlated to stocks.

Credit Card Debt: Despite some politicians claiming the economy has been strong since the end of Covid, US credit card debt hit a record $930.6 billion last quarter.

Bond Vulnerability: Aggressive rate increases by the Fed and other central banks have dramatically impacted lending and credit markets. Bonds in general have not provided the traditional protection many assumed it would—but gold has and will continue to do so.

Resumption of QE? After interest rates, what is the Fed’s number one tool? Printing! It will be entirely unsurprising to see quantitative easing (currency creation) resume at some point this year, whether it be due to lower tax revenues, a recession, a debt-related event, or a black swan.

Gold Demand: It’s official: central banks bought more gold in 2022 than any year since they began keeping records. Central banks have been net buyers of gold since 2009. This offers a strong floor to the gold price, and all indications point to this trend continuing.

Gold/silver ratio: The ratio (gold price divided by silver price) ended the quarter at 81, almost a third above its long-term average of 55. It fell to 32 in 2011, and 20 in 1980. Silver remains deeply undervalued relative to gold.

- The need for a safe haven asset is clear. The banking crisis, recession risks, stubborn inflation, and interest rate risks leave investors with few places to turn. History shows gold is a strong choice to balance a portfolio in this type of environment.