Precious Metals Slumped in April but Could Breakout

As the U.S. dollar climbed 4.7%, risk assets were bound to get bruised, but gold bullion kept up a 3.70% YTD climb despite a rocky April, while silver declined 2.27% YTD. Mining equities also had a rough month, but remained up 12.01%.

Bullion closed the month out at $1,896.93. Wong points out that the first half of April was strong for safe haven assets, but a de-grossing event led to an across-the-board outflow amid record volatility. The entire S&P 500 Index was pummeled, tumbling 8.8% in April. The Nasdaq Composite Index had its worst month since 2008, dropping 13.26%.

A number of factors are knocking the markets around. The Russia-Ukraine war shows no signs of abating, and the IMF lowered global growth expectations. COVID is on the rise, leading to lockdowns in China, and continued supply chain stress continues to fuel an economic slump. Concerns about stagflation are becoming more pronounced, and the Fed has created a challenging, hawkish ambience

Wong sees some rays of hope for previous metals, with gold bullion showing breakout signs, noting, “though the price volatility is elevated, our Gold Bullion Positioning Index has stayed in a narrow range, indicating that price volatility was more due to a lack of liquidity than selling pressure.”

Wong also doesn’t see much consensus on the shape of inflation. Gold performs well in a high inflation environment, and it was exceptional in the last era of stagflation. “Looking ahead, inflation and expectations will continue to rile markets,” Wong says.

Wong also sees potential dangers in quantitative tightening, saying, “QT is likely to be a massive change in the flow of funds in and out of U.S. Treasuries, affecting every asset class. In short, QT will lower the tipping point of a potential overshoot in Fed rate hikes. The expected fastest rate hike since 1989 (0 to 300 basis points in 12 months, including three 50 basis point rate hikes) plus QT is an off-the-charts level of tightening and this will likely impact equities, credit and especially bonds.” The U.S. Treasury is currently sitting at a 2022 YTD return of -8.5%.

Meanwhile, the yen has fallen to 20-year lows due to rate differentials. As the Fed raises rates, the yen is likely to weaken further and is currently directly correlated with U.S. yields. Into this mix comes the yuan, which Wong notes as an “on/off semi-soft peg to the U.S. dollar.” With the yen weak, the yuan had recently reached a four-year high in February. As other currencies have weakened against the USD, the yuan has reached a breaking point. The COVID lockdown in China is also impacting the yuan and exacerbating pressure on commodity manufacturing.

Looking at all of these pieces on the board, Wong writes, “The risk of a competitive currency war is brewing again, with the root cause being wildly divergent central bank monetary policies. Japan and China have GDP growth concerns and need to remain dovish, while the U.S. has far too much inflation and needs to hike aggressively. The widening rate differentials are pushing their respective currencies in opposite directions.”

Silver is a unique precious metal in that it has utility both as a store of wealth like gold and as an industrial metal with a variety of uses. Historically, gold prices lead silver prices, and Wong thinks that this will hold true even though silver is currently lagging compared to gold.

Silver is a chief component in the energy transition, and photovoltaic cells need silver to function. In 2022, photovoltaic demand is expected to represent 11.5% of all silver demand, having grown 10.8% in the past nine years. Wong sees silver prices as becoming increasingly correlated with energy transition equities.

Ultimately, Wong sees a number of factors currently in play. Geopolitical risk, global stagflation, a potential currency war, an ongoing shooting war, increased volatility, and more lockdowns impacting the supply chains mean that safe haven assets like precious metals stand to gain quite a bit. Silver, in particular, is poised to rise quite a bit, making it a great buying opportunity for the coming months.

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