Bullion Bulletin: Gold doing its job

The first half of 2022 was rotten for investors in most assets – except gold, which according to various commentators is “doing what it’s supposed to do” which is preserving its value “and your capital”.

Warning lights in late 2021 that inflation was getting a firm grip in many places started to flash with increasing frequency in early 2022, thanks to the Russian invasion of Ukraine. The UK is probably headed for 11% inflation this year, according to the Bank of England. Turkey’s latest inflation is close to 80%. The multi-trillion Dollar ‘stimulus’ give-aways by governments to bat away the possibility of a global recession flooded economies with ‘free’ fiat money (and raised government debts) tilled the soil for global inflation. Russian tanks (and Western sanctions) sowed its seeds. The plants have grown and the harvest is being gathered.

That provides the context for the first half of 2022 – investors knew that the major central banks would belatedly get around to pushing up interest rates to try to quell inflation. Their biggest fear became that the medicine for high inflation – high interest rates – would taste so bad that it would bring about a recession. Thus, they got out of just about everything except those assets clearly in strong demand and short supply – crude oil, natural gas, wheat, commodities generally – and the supposed safe haven, the US Dollar. But gold ended the first half of the year just 1.2% lower in US Dollar terms and was up an average of 5.5% against a basket of nine currencies (including the Dollar). Those assets perceived as having high risk, such as tech stocks, were the worst performers. In the second quarter of this year Tesla’s share price suffered a 38% decline, its biggest drop since its 2010 public flotation.

US stocks had their worst first-half drop in 50 years, with a loss in market value of more than $9 trillion since the end of 2021.

Will the second half of 2022 be any better, or will losses get worse? That very much depends where people think we are in the business cycle – still in the downswing or poised for an upturn? Many economists and business executives envisage a recession ahead. Robert Dent, a former analyst with the New York Federal Reserve, told Bloomberg that the “good news is there’s a limit to how severe it’s going to be… The bad news is it’s going to be prolonged”. He foresees a contraction of about 2% that begins in the fourth quarter of this year and lasts through next year. There have been a dozen recessions in the US since World War 2, lasting an average 10 months, the economy contracted by 2.5%, unemployment rose about 3.8% and corporate profits fell around 15%.

The major central banks – the European Central Bank, the Bank of England, and the US Federal Reserve – seem more united than for many months in recognising the need to raise interest rates to stifle inflation. The danger is that they may lag events and make money and credit more expensive as their economies are already weakening. In three-quarters of all market recessions since that of 1976 the value of gold has increased significantly, while the S&P 500 has sunk.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.