GOLD
The gold outlook for 2022 After 2021’s ups and downs, what can we expect of gold in 2022? Andrew Naylor, regional CEO APAC (ex China) of the World Gold Council, details the year ahead and the various factors that could impact the commodity’s performance. the Australian inflation story hasn’t been as pronounced, it’s still a concern and is one of the factors driving interest in gold. Gold has long been considered a hedge against inflation and the data confirms this. The average annual return of 11 per cent in US dollars over the past 50 years has outpaced the Australian and world consumer price indices (CPI). World Gold Council research demonstrates that gold also protects investors against high and extreme inflation. In years when inflation was higher than 3 per cent, gold’s price increased 20 per cent per year on average. Over the long term, therefore, gold has not just preserved capital but helped it grow.
Gold is likely to face similar dynamics in 2022 to those of 2021.
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021 was a mixed year for gold – although consumer demand started to recover, weaker investment demand saw the price soften from the record highs of 2020. Gold finished the year approximately 4 per cent lower, closing at $US1806 ($2515) per ounce. The gold price rallied into the yearend on the heels of the rapidly spreading Omicron variant, likely prompting flightto-quality flows, but it was not enough to offset first-half weakness. SOURCES OF DEMAND To understand the outlook for gold, it’s important to appreciate the sources of demand. Gold is a unique asset in that its demand profile is unlike any other. Economic expansion tends to support consumer demand (bars, coins and gold jewellery). It also supports industrial demand, which on average accounts for approximately 7 per cent of annual demand. Conversely, economic uncertainty is a big
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driver of investment demand. Other factors, including the interest rate environment and tactical positioning, also influence investment interest in gold. But it’s this unique demand profile – it has both pro- and counter-cyclical demand – and its use as an industrial asset as well as a financial asset, that makes gold so interesting. In short, it can perform differently to other assets. This is reflected in its lack of strong correlation to many other assets, particularly in downturns. And there results one of its key uses in a portfolio – as a diversifier. I N F L AT I O N A major theme on the economic horizon is inflation. In the final quarter of last year global inflation continued to rise, especially in the United States where it rose to 7 per cent in December. This is the highest since 1982. Germany and the United Kingdom are also impacted, with both recently posting the highest inflation figures in 20 years. Although
OUTLOOK FOR GOLD Gold is likely to face similar dynamics in 2022 to those of 2021. Competing forces will both support and curtail its performance. Consumer demand will likely be supported by the continuing economic recovery, particularly in the major goldconsuming markets of Asia. Near term, gold’s performance will likely be impacted by real rates in response to the speed at which global central banks tighten monetary policy. Their effectiveness at controlling inflation will also have an impact. As we start 2022, the US Federal Reserve is signalling a more hawkish stance. Its projections suggest the Fed will hike interest rates approximately 3 times over the course of the year. This is quicker than expected, but World Gold Council analysis of previous cycles of monetary tightening shows that the Fed has tended not to tighten as aggressively as members of the committee previously indicated. Our research also suggests that gold typically underperforms in the run up to a Federal Reserve tightening cycle only to rebound in the period following the first rate hike.
