Welcome to Kitco News’ 2022 outlook series. The new year will be filled with uncertainty as the Federal Reserve looks to pivot and tighten its monetary policies. At the same time, the inflation threat continues to grow, which means real rates will remain in low to negative territory. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2022.
(Kitco News) – Commerzbank has been commenting on the gold market frequently this year. Commodities analyst Carsten Fritsch has released his latest report outlining some important themes for the upcoming year.
He noted “We see upside potential for 2022. The US Federal Reserve is likely to raise interest rates. However, this will not change the environment of negative real interest rates, which is favourable for gold. This speaks for a stronger investment demand again.”
Speaking about some of the other precious metals he noted “Silver should also benefit from robust industrial demand, driven in particular by “green” themes such as photovoltaics and electric vehicles. Platinum should only rise in line with gold despite a strong increase in demand from the automotive industry. A better price development should be prevented by a looming supply surplus. Palladium, which has fallen particularly sharply this year, should only make up a small part of the losses. This is because the recovery of demand in the automotive industry is being curbed by substitution effects.”
The report said that “gold was exposed to numerous influencing factors this year that prevented a better price development. Of particular note is the significant appreciation of the US dollar, which in November reached its highest level since July 2020 on a trade-weighted basis and is 7% firmer than at the beginning of the year”
Jewellery demand has been firm this year and Fritsch noted “Another factor was the fall in prices over the course of the year, as jewellery demand is price-sensitive. The former factor is still likely to apply in 2022, while the others are likely to become less important. Therefore, jewellery demand is likely to lose momentum.”
Looking forward the report said “The coming year is likely to be dominated by the question of how the central banks react to the significant rise in inflation rates. In the US, inflation is currently at a 39-year high of 6.8%, in Germany at more than 5%, the highest level in 29 years, and in the Eurozone at 4.9%, the highest since the start of the monetary union in 1999. The Fed and most other central banks have so far classified the strong rise in inflation as transitory and intended to take their time with the exit from ultra-loose monetary policy. However, market-based inflation expectations in the US rose to around 2.7% in November after the unexpectedly high inflation rate was published.”
Looking into the details the report said “This means that market participants do not expect inflation to return to the Fed’s 2% inflation target in the medium to long term. Should the higher inflation become entrenched and the central banks fail to react appropriately to it, gold would probably benefit from this as an inflation hedge. According to a study by the World Gold Council, gold stands out with its price performance in phases of high inflation (inflation >5%). Even with inflation rates between 2% and 5%, the performance of gold is still significantly positive.”
Fritsch also noted that the Fed has meanwhile started to rethink its stance on inflation. Fed Chairman Powell, who has just been nominated for a second term by US President Biden, recently no longer described the high inflation as transitory. He has also spoken out in favour of reducing bond purchases more quickly than previously planned. Several other Fed officials expressed similar views. With the Fed’s shift in opinion towards an earlier tightening of monetary policy, inflation expectations fell again to 2.4%, but thus still remain elevated.
When it comes to Central banks, the report said they will continue to play an active role in gold demand. After central bank gold purchases fell to a 10-year low of 255 tons last year, buying interest increased noticeably again this year. After three quarters, the purchase volume was already close to 400 tons. The WGC expects at least 450 tons for the whole year. While the previously most important buyers Russia, China and Turkey did not buy gold (anymore), other central banks stepped into the breach. Brazil, India, Thailand, Uzbekistan and Hungary are particularly worth mentioning. The Polish central bank has already announced its intention to buy 100 tons of gold. The same is likely to apply to many other central banks. Because of its low correlation to other asset classes, gold is excellently suited for diversification. Moreover, many central banks are likely to be eager not to let the USD share in their currency reserves become too large. The USD is already significantly overvalued, which implies the risk of currency losses. In addition, there is a latent risk that the US government could use the USD as political leverage for sanctions. This risk exists in particular for larger emerging economies that are in political and economic competition with the US. Gold does not have such a sanction risk.
Investment demand is also important as the bank said “the crucial question, however, is when gold ETFs will also start to see inflows again. Because these are decisive for the price development of gold, as the years 2019 and 2020 impressively showed. Between May 2019 and October 2020, there were inflows of 1,450 tons, according to the WGC, which caused the gold price to rise by more than 60% at times to a record high of USD 2,075 per troy ounce. For ETF investors to return, the bull run in the US equity markets would probably have to end. As mentioned above, ETF outflows occurred primarily in US-listed ETFs, while ETF holdings outside the US remained largely stable.”
What could go wrong? Fritsch said “headwinds for gold could initially come from the aforementioned change in direction by the US Federal Reserve. In November, the Fed began to gradually reduce its monthly bond purchases of USD 120 billion by USD 15 billion each month. At this pace, it would take until mid-2022 for the bond purchases to be fully phased out. However, several Fed officials, including Fed Chair Powell, have hinted at ending bond purchases earlier, in view of high inflation, in order to be able to raise interest rates afterwards. There is talk of doubling the volume to USD 30 billion, by which the bond purchases will be reduced per month.”
Looking forward “A decision on this is to be made at the Fed meeting in mid-December. Our economists expect bond purchases to end as early as spring 2022. They also expect a first Fed rate hike in the middle of the year and two further rate hikes during the course of the year. However, the market has already priced this in, according to the Fed Fund Futures, so gold should no longer be additionally affected by this. In the last interest rate hike cycles, gold tended to weaken in the run-up to the first rate hike. After the start of the rate hike cycle, however, the price began to rise, provided market expectations for the rate hikes did not need to be adjusted further, i.e. the Fed remained on track. We consider such a pattern likely this time as well. This argues for a rather subdued price performance in the first half of the year and a stronger price increase in the second half. We therefore expect a gold price of USD 1,900 per troy ounce at the end of 2022, which is, however, USD 200 less than in the previous forecast. We now do not expect gold to return to USD 2,000 until 2023, which was previously forecast for 2022.”
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