Gold Price Looks Toward Resurgence if the Dollar Rally Continues Drying Up

Q1 data shows gold demand started the year off strong. However, prices for the precious metal have backed off from their 2022 highs as the Fed begins to tighten up monetary policy. The Dollar has risen strongly on the back of the Fed’s plans for several months, depressing the price of gold further.

The minutes from the FOMC’s most recent gathering, released yesterday, show the central bank gearing up for two more 50bps rate hikes following one this month. Surprisingly, that release failed to move the Dollar, which could indicate a significant amount of front-running by traders already pricing in a 2% upper limit on the Fed Funds rate. If inflation continues to hold strong, despite the Fed’s tightening regime, that could be a positive signal for gold prices moving forward.

Related ETF: SPDR Gold Shares (GLD)

Though all of 2021, central banks added 463 tons of gold to global reserves, an 82% jump YoY. Buying slowed toward the end of the year, but Schiff Gold reports global central banks have begun to re-accelerate their buying this year. Net gold holdings increased by 83.8 tons in Q1 2022, more than doubling the 41.2-ton expansion of central bank gold reserves in the previous quarter.

The World Gold Council reports physical gold demand (excluding OTC) increased 34% YoY to 1,234 tons, the largest increase since Q4 2018 and 19% above the five-year average of 1,039 tons. Meanwhile, gold ETFs had their strongest quarterly inflows since Q3 2020.

That strong demand, largely spurred on by geopolitical uncertainty, helped gold prices start the year strong. Gold crossed the $2,050 per oz threshold in March for the first time since 2020 but has since then weakened by about 10%.

Still, ETF inflows continued into April, as global gold ETFs registered net inflows of 43 tons (equivalent to $3 billion) – a fourth consecutive month of positive flows. Additionally, CNBC reports the Central Bank of Russia resumed gold purchases in their domestic metals market after a two-year absence.

According to Charles-Henry Monchau, chief investment officer at Switzerland-based Syz Bank, Russia resumed gold purchases at a fixed price of ₽5,000 per gram (₽141,748 or $2,268 per oz) between March 28 and June 30.  However, given the Ruble’s rapid appreciation throughout the past several months, touching a seven year high versus the US Dollar (USD) in recent days, Russia has said they will renegotiate that price.

Part of the reason for gold prices being restrained below all-time highs, despite solid demand in the market, is the fact that the metal is priced and traded in US Dollars. Aside from the Ruble, the Dollar has been rising rapidly versus virtually all…