Rising inflation across all regions can boost gold as it is seen as a natural hedge
2021 was not a good year for gold as it lost about 4 per cent — the first negative yearly (calendar year) returns in the last six years. This follows strong gains of 28 and 24 per cent in 2020 and 2019 respectively.
Investment demand, aided by the unprecedented liquidity provided by central banks, powered the rally in the preceding two years. However, in 2021, several factors played out against the precious metal. One, there was a significant drop in investment demand because of outflows in ETFs. Investment demand in the first three quarters of 2021 dropped by 38 per cent to 700 tonnes, according to latest World Gold Council (WGC) data. Two, the dollar picked up strength since June and thus, the dollar index appreciated by nearly 7 per cent in 2021. Three, as economies opened up, investors started playing risk-on game and this is not particularly the favourite turf for gold.
Finally, the US Federal Reserve, towards the end of the year, announced the timeline to end its asset purchasing programme and the latest dot plot indicated three possible interest rate hikes in 2022. However, despite so many negative factors, gold avoided a deep fall in price. Jewellery demand, which went up by 48 per cent to 1,323 tonnes last year (first three quarters as per WGC), can partly explain this.
What awaits gold in 2022
Now it is almost certain that the Fed is likely to start raising rates in 2022 although the pace may vary from the expectations. In that sense, treasury bills, which come with safety as well as an interest payment, might appeal more to investors, which can result in some asset reallocation from gold to US treasuries. In addition, increase in US interest rates can further strengthen the dollar. This will certainly have a negative impact on gold prices.
On the other hand, rising inflation across all regions can boost gold as it is seen as a natural hedge against rising inflation. Also, economic recovery means more disposable income with people, which can translate into better consumer demand. Particularly, jewellery demand, which is already on a rise, can push demand up for the yellow metal.
That said, the Omicron variant of coronavirus, though deemed to be less fatal, is proving to be more contagious and is spreading fast across regions, particularly Europe. The weekly Covid report by the World Health Organization (WHO) shows that in the week ended December 26, the number of new Covid-19 cases in Europe increased by 39 per cent — new daily cases in some countries have already surged to record levels, straining the healthcare system. Global fresh cases too are up by 11 per cent in the corresponding week. Governments have started imposing restrictions and this is creating fresh uncertainties on the economic growth front. .
To summarise, central banks closing the liquidity tap and possible rise in interest rates can have negative effect on gold prices. However, hardening inflation, bettering jewellery demand, and continuing ambiguity around coronavirus and resultant uncertainty in monetary policy can support the yellow metal. The slowdown in Chinese economy is also seen as a cause of worry for the global economy. Overall, the positive factors for gold might outweigh the negative factors and, therefore, prices can be expected to appreciate in 2022.
Also read: Fixed income outlook for 2022
Gold began rallying from about $1,200 in October 2018, which eventually led to the breakout of the critical resistance area of $1,360-$1,400. Following this, the yellow metal picked up more momentum, establishing a strong uptrend. This continued until gold hit a fresh all-time high of $2,075 in early August 2020. Thereafter, the price began to soften and in 2021, it largely held in the broad range of $1,680-$1,920.
Ideally, until gold moves out of this range, the next leg of trend will remain uncertain. However,the support band of $1,680-$1,700 is holding strong and the likelihood of these levels getting breached is low. Even if price slips below $1,680, the 50 per cent Fibonacci retracement level of the prior rally at around $1,620 can be expected to arrest the decline.
In our view, gold will most likely touch $1,920 in 2022. A breach of this level can induce more upward momentum. The overall trend is bullish and there are significant support levels. Although gold might experience some weakness in the first few months of 2022, it can be expected to produce positive returns this year with potential targets at $1,920 and $2,075.
Gold futures on the Multi Commodity Exchange (MCX) is forecast to reach ₹52,300 (per 10 grams). If the momentum sustains, it can retest ₹56,000 levels during the year.
Also read: Equity outlook for 2022
Irrespective of the market conditions, one can always maintain 10 to 15 per cent of gold in overall portfolio as it is an effective diversifier. If you would like to own gold, Sovereign Gold Bonds (SGB) issued by the RBI and Gold Exchange Traded Funds (ETFs) offered by mutual fund houses are the preferred options. For those who don’t have a demat account, gold funds (fund of funds with ETF as underlying) are available too.
Inflation and jewellery demand could be a key driver
Interest rate hike can be a dampener
Long-term bull trend intact on charts