The World Gold Council (WGC) reports that, in the first quarter of this year, gold traded higher for a second consecutive quarter, ending 8% higher than in the fourth quarter of 2021, at $1 942/oz – its best quarterly performance since the second quarter of 2020.

The WGC also states that gold was among the best-performing assets amid significant weakness in both equity and bond markets, proving to be a reliable source of diversification and wealth preservation in a period marked by economic uncertainty and increased volatility.

Gold’s performance in the first three months of this year was primarily driven by rapidly rising inflation, higher interest rates and unexpected geopolitical risk.

In addition, Russia’s invasion of Ukraine added an additional layer to gold’s rally, as investors sought high-quality safe haven investments like gold amid equity market volatility and compounding unanticipated inflation pressures, including record oil prices.

Looking ahead, the WGC notes that nominal rates remain a risk, but inflation and geopolitics support the need for hedges, driving further growth in gold.

A prolonged conflict in Ukraine will likely result in sustained gold investment demand, the council states.

In contrast, a swift resolution to that conflict may result in some tactical positions in gold unwinding; but much like in 2020, the WGC believes significant strategic positions will remain.

Nonetheless, the WGC foresees the opposing forces of inflation and rising rates likely being the strongest influences on gold in the second quarter.

POST COVID-19

The post-Covid-19 economic recovery and supply-side disruptions, which have been exacerbated by the war in Ukraine, will likely keep inflation higher for longer, the WGC states.

In this regard, central banks have shown they are prepared to act, with the US Federal Reserve (Fed) starting to raise rates, following the Bank of England which has now raised rates in the last three meetings.

Even the European Central Bank (ECB), which has resisted growing calls to action, indicated a more hawkish stance at its most recent meeting.

While the WGC’s historical analysis shows that gold has typically performed well following the first rate hike in a tightening cycle, the council nonetheless believes gold may come under renewed pressure around the forthcoming Fed and ECB meetings.

However, the WGC points out that the war in Ukraine is also affecting the global economic recovery, thereby recently prompting a number of ratings agencies, such as Fitch, to lower their growth forecasts for this year.

Widespread rising inflation expectations, low growth and falling consumer confidence may further complicate central bankers’ policy decisions. They have also reignited the fear of stagflation – an environment in which gold has historically performed well.

As for exchange traded funds (ETFs), net inflows of gold ETF’s totalled 187 t in March, contributing to net inflows of 269 t ($17-billion) in the first quarter – the highest level of quarterly net inflows since the third quarter of 2020, and eclipses the 174 t of net outflows in 2021.