Investors seeking respite from market volatility during the first quarter found refuge in gold and silver exchange-traded funds (ETFs) and products (ETPs), with both categories seeing increased inflows.
Gold demand increased 34 percent year-over-year in the first three months of 2022 as inflation and Russia's invasion of Ukraine pushed energy prices to record highs and disrupted fragile supply chains.
Demand for the yellow metal ballooned to 1,234 metric tons (MT) during the period, the highest level seen since the fourth quarter of 2018. Safe-haven demand drew retail investors to gold ETFs, which saw inflows of 269 MT, completely reversing 2021’s 174 MT of net outflows.
“However, this activity has not — as far as we can tell — been mirrored in futures or the OTC market,” the World Gold Council's (WGC) latest gold demand trends report notes. “This suggests that had demand been equally strong across all segments of investment demand, prices might be higher still, given the fundamentally supportive environment for gold. It also underlines that gold is currently neither overbought nor over-owned.”
Inflows could remain elevated for the rest of year as economic conditions are expected to worsen amid geopolitical conflict and soaring inflation. Deutsche Bank (ETR:DBK) economists recently sounded the bells for a “major recession” in the US, with the economy rapidly decelerating in the latter half of 2023.
Current conditions paired with the bleak economic outlook point to more erosion of investor risk appetite and ultimately a higher gold price. “Gold tends to perform well in periods of systemic risk, including recessions, often rising as investors look for high-quality, liquid assets while equity markets fall,” Juan Carlos Artigas, the WGC's global head of research, told the Investing News Network.
“Moreover, even if the US avoids an actual recession, the odds of a period of stagflation — a combination of slow growth and high inflation — are increasing," he said. "Our analysis shows that gold tends to be one of the best-performing asset classes in such periods, as investors tend to look for assets such as gold to preserve capital.”
Silver ETPs see sustained uptick
As gold ETFs recouped and surpassed 2021's losses during Q1, silver ETFs continued a trend of new inflows from January to March. This came after silver demand grew across all segments in 2021 for the first time since 1997.
“So far in 2022, ETP holdings have climbed again, as silver has benefited from rising safe-haven demand amid geopolitical turmoil and growing inflationary expectations,” this year's World Silver Survey reads.
“With retail investors still accounting for most of the total, the scale of liquidations has been modest, with global holdings remaining sticky and close to their record high.”
Silver’s discount (average 2021 price of US$25.14 per ounce) compared to gold (US$1,798 per ounce) made it the precious metal of choice, with demand totaling 1.05 billion ounces for the year. Metals Focus, the firm that prepares the Silver Institute's annual survey, is forecasting a 5 percent increase in silver demand this year.
Like gold, silver is poised to see increased investor appetite if a recession does materialize next year.
“Another, positive driver for silver investment and prices is the growing risk of a so-called 'policy mistake'; the risk that the Fed tightens policy too aggressively, triggering a recession,” the Silver Institute's recently released report states. “This is amplified by at least part of the current inflationary pressures being related to rising input costs, rather than elevated levels of demand.”
If rate hikes are unable to ease inflation, economies could be hit hard by the dual impact of rising prices and borrowing costs, the analysts warn. Additionally, there is the potential for a correction in equity markets.
“As asset prices are a transmission mechanism for monetary policy, this could in turn also trigger a recession,” the document reads. “The recent inversion of the US treasury yield curve is a reflection of all these concerns.”
By the end of Q4, analysts expect silver to have an annual average price of US$23.90, while ETPs are seen recording a fourth year of positive inflows totaling 25 million ounces, or 778 MT.
Similarly, gold is expected to keep its investment demand pace throughout the year.
“If the current geopolitical and high-inflation narrative lingers — making a stagflationary shock more likely — then investment demand should remain well supported,” the WGC's outlook states.
“But any resolution to the crisis and perhaps a soft economic landing amidst higher interest rates would put downward pressure on investment demand in some regions as the market resumes its focus on economic recovery and higher interest rates," it continues.
With so many unknown factors, gold could see its annual average climb as high as US$1,850 or alternatively could remain constrained at a more moderate level.
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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