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Gold – not so precious in 2022?

Price prospects for the year ahead are not favourable, although the possibility exists for a near-term breakout
Gold – not so precious in 2022?
  • Real interest rates still in negative territory
  • US Fed bond buying predicted to slow through the year

The gold price dropped 6.2 per cent over the course of last year, which is somewhat surprising given the way that inflationary pressures have been bubbling up. There have also been signs that central banks are becoming more wary of the corrosive impact that a prolonged period of inflation would have on the global economy.   

Across the pond, US Federal Reserve chairman Jerome Powell and Treasury secretary Janet Yellen have both backtracked on their earlier assertion that the price rises hurting consumers were “transitory” in nature. And, in November, western central banks added gold to their reserves for the first time since 2013, while global gold exchange traded funds (ETFs) had their first month of inflows since July.

Natural gas prices have started to moderate due to rising output, although supply chain issues are likely to drag on even if the omicron variant signals the beginning of the end of the pandemic. That’s far from assured, so institutional investors could yet renew emphasis on downside protection, providing support for the use of bullion and gold derivatives as a hedge.

Even if supply chain disruptions ease over time, it’s likely that wage growth could prove to be the principal driver of inflation through 2022 due to persistent staffing shortages. That dynamic has yet to fully play out and, unlike energy costs, wage increases aren’t tidal – they don’t tend to pull back.

Above all, attention will focus on interest rate calls through the year. December's decision by the Bank of England’s Monetary Policy Committee to raise the base rate is being viewed as a harbinger, generating speculation that the US Federal Reserve will soon follow suit.

But central banks may have limited room to manoeuvre given that many businesses have effectively been on life support during the pandemic, so increased borrowing costs could harm recovery prospects. And that’s to say nothing of the growth in national debt either side of the Atlantic. For now, with UK CPI inflation running at 5.1 per cent, it’s worth remembering that real interest rates remain in negative territory, providing further theoretical support for the yellow metal.

The flipside of the inflationary argument is that it could feed through to extraction costs. One of the reasons why some investors opt for gold miners over a derivative position is that the miners have high fixed costs and low variable costs, thereby providing enhanced operational leverage. It means that their trading profits are disproportionately impacted by the price of the underlying asset. Good news when prices are on the fly; rather less so when they’re headed in the opposite direction.

What are institutional voices saying? Well, no one seems overly optimistic on prices, particularly in relation to the second half of the year. JP Morgan Global Research, although upbeat on prospects for the broader commodities complex, sees the gold price retreating to pre-pandemic levels in 2022, while ABN Amro has pitched an estimate of $1,500 (£1,109) an ounce (oz) for the year-end.

It appears, therefore, that any concerns over inflation have taken a back seat, as the US Federal Reserve flags accelerated tapering and the prospect of multiple rate rises. In addition, it is likely that Joe Biden’s signature “Build Back Better” bill will not make it through Congress prior to the US mid-term elections, if at all. The Congressional Budget Office estimates that the bill would cost around $4.78 trillion through to 2031.

Despite the President’s protestations to the contrary, it is difficult to imagine that it would not have eroded household purchasing power, while further debasing the greenback. Spending on this scale would certainly provide additional support for the gold price, but the general economic outlook is clearly brighter – or at least less uncertain – than it was when gold touched $2,061 per oz in August 2020.

The consensus points to softening gold prices throughout 2022, but this is a momentum-driven market – and institutional investors tend to be somewhat skittish in this area. Indeed, some technical analysts believe that gold is now trading at a resistance point, so it is possible we could even witness some significant near-term gains if the $1,830 per oz mark is breached.