The Outlook for Gold Trends in Q2, 2022

Gold has always been a valuable asset, which is why it’s always been desired and in demand. However, in recent history, the gold market has evolved into a mature and stable market.

In Q1’22, gold prices outperformed pessimistic predictions as the yellow metal added over 13.15% to its value.

But with the U.S. dollar experiencing a twenty-year high, gold prices hit a three-month low in May. Fortunately, in June, Gold rallied and reached the highest price level since May.

Thus, the outlook for gold trends proves mixed in the second quarter.

Central Bank and Retail Demand

During the 2^nd quarter of 2022, investors expected gold demand by central banks to hit historically high levels.

The global economy becomes more volatile as supply tightens due to increasing inflation rates in the U.S. and E.U. and unresolved problems. Thus, gold prices are poised to elevate.

U.S. Real Yields

The supply chain disruption by Russia’s invasion of Ukraine significantly affected gold prices. As The Central Bank attempts to lower higher realized inflation in the short-term, that will likely slow down the long-term inflation.

Since Gold does not have a dividend yield, rising U.S. real yields can prove problematic. As inflation increases, assets that offer better risk-adjusted returns gain favor over those that don’t yield significant returns.

Thus, Gold’s volatile behavior can impact its prices and popularity.

What were the Forecasts for Gold’s Performance in Q2’22?

Most analysts predicted inflation rates would decrease from 5.4% in July 2021 to 2.6% in 2022.

The forecast followed the Central Bank’s guidance that elevated inflation is transitory and that Treasury yield will likely rise. An increase in yield would cause it to reach a higher level than we observed in 2019.

Furthermore, analysts believed that the U.S dollar would decline from 200k contract net long to 130k in Q2’22.

A futures contract is a legally binding agreement for the delivery of Gold or silver at an agreed-upon price in the future. A futures exchange standardizes the contracts as to the quantity, quality, time, and place of delivery. Only the price is variable.

The Bull Case

The bull case explores alternates to the above consensus. This section reveals what happens in case inflation doesn’t decline. We’ll also cover what happens if the Central Bank’s predictions are wrong.

In this scenario, market analysts forecast inflation to fall from 3.5% and Treasury yields to rise to 1.5%.

Moreover, if the Federal Reserve doesn’t tighten rates, the source of U.S. dollar depreciation from 2020 may return.

Market analysts from Wisdom Tree also expected Gold to maintain a net positioning at 200k. They also predicted the yellow stone to beat the all-time high price of US$2075 in 2020.

The Bear Case

Lastly, analysts explore the impacts of the Federal Reserve tightening monetary conditions in the bear case.

If that happens, demand and inflation may hit the 2% target. In this scenario, gold prices could hit US$1550 by the forecast horizon.

The bear case is unlikely to occur since the current economy is not healthy enough to withstand monetary tightening.

Furthermore, Gold has shown low volatility as the gold prices hiked back and crossed over the $1,800 dip. This has attracted numerous investors as a safe-haven asset while there is uncertainty in the stock market.

However, not all analysts are optimistic as the inflation is high, but it has dropped down from its peak. According to the U.S. Department of Commerce, the annual inflation rose to 4.9% in mid-June compared to 5.3% in February and 5.2% in March.

This shows that the inflation fell following the bearish market, yet current risks make the downward trend unlikely to happen.

What Does the Outlook for Gold Trends Look Like in the 2^nd Quarter?

Although Gold performed poorly throughout 2021, global market analysts predicted the yellow metal to do much better in 2022.

Here are forecast for gold trends in the second quarter:

Potential for Crisis Might Support Gold

Two geopolitical conflicts grew worrisome during the past months: China’s insistent claim to Taiwan and Russia’s invasion of Ukraine. Both crises impacted global trade and fuelled gold prices.

However, if a ceasefire between Ukraine and Russia occurs, it will likely release the stranglehold on food and energy prices in the E.U., the U.S., and the U.K. As a result, inflation expectations will reduce.

But due to high inflation readings in economies, central banks have maintained high-interest rates throughout Q2 2022.

Gold Loses Value As Dollar Rallies

Since the begging of January 2022, the dollar has strengthened, affecting gold prices negatively. Gold price reached $2070 on March 8th and fell due to new geopolitical issues and increased interest rates to fight fast-growing inflation.

Source: Capital

Currently, the U.S. dollar benefits from uncertain macroeconomic environments due to high inflation, potential recessions, slow growth in China, and the Russia-Ukraine war.

According to the U.S. Dollar Index, the dollar hit 104.85 on May 12th before declining to 104.09. Since the dollar tends to increase inverse to Gold, the decrease led Gold to elevate by $0.9%.

Sudden Change in Prices in June

Gold prices experienced a drop during May due to the increase in the monetary value of the U.S. dollar and Japanese Yen.

However, as both currencies weakened against their peers, the gold price rose from the mid-May low point. Despite the price trading above $1,800, the commodity failed to reach the $2,000 high experienced in early March.

Source: https://www.monex.com/gold-prices/

Furthermore, a weaker U.S. dollar provides Gold with positive momentum but has been unsuccessful in changing analysts’ longer-term bullish perspective on Gold.

What is Gold’s Positioning Now?

Source: https://capital.com/gold-price-forecast

On Friday (June 17th’ 22), Gold experienced a drop, losing the progress it had made during the previous two weeks.

As dollar and Treasury yields hit a rebound, bullion experienced a weekly drop, reaching $1850 an ounce.

Gold is down over 1% due to increased interest rates to calm down surging inflation in financial markets.

But with concerns about potential market tightening keeping people on edge, gold prices may shoot up in the coming weeks.

According to market analyst Saxo Bank, geopolitical concerns may add price pressures and fear of slower growth. As a result, volatility will elevate, and gold prices may rise.

Moreover, market analysts at ANZ believe that concerns about global economic growth, sustained inflation, and geopolitical risks may protect or increase gold prices. They expect Gold to stay at US$1,850 and rise to US$1,950 an ounce.

To Sum it Up: What is the Future for Gold?

If the Ukraine-Russia war stops, it’s unlikely the environment will favor gold prices.

While analysts believe the E.U. and U.S.’s sanctions against Russia threaten the dollar’s positioning, encouraging countries to replace dollar reserves with Gold, it’s a long-term story.

For the second quarter, and maybe the whole year, the U.S. dollar and EUR remain the top most popular currencies worldwide.

Thus, gold prices have two options: move sideways– if inflation elevates and central banks raise rates- or drop– if inflation sinks, real yields appreciate, and central banks raise rates.

Sources:

https://capital.com/gold-price-forecast

https://www.xetra-gold.com/en/gold-news/news/gold-opportunities-and-risks-in-2022/

https://www.dailyfx.com/forex/fundamental/forecast/weekly/chf/2022/04/02/Gold-Fundamental-Forecast-Q2-2022.html

https://www.wisdomtree.eu/-/media/eu-media-files/other-documents/research/market-insights/wisdomtree_gold_outlook_q2_2022_en.pdf