Gold’s disappointing performance over the past year seems worse than it was given the economic environment in which it has taken place, which has been marked by inflation.
Indeed, the inflation rate in the United States has grown from 1.4% in January 2021 to 7.0% last December, in what has been the largest increase in 12 months since the period ending in June from 1982.
We are talking about the fact that the US has registered the highest rise in inflation in the last 40 years. And in other countries, the figures have also been historic. However, we look at US inflation because, remember, gold is an asset that is priced in the US currency.
In fact, if the price of gold has risen in any of the major international currencies, the rise in inflation has effectively canceled out that rise.
Along with inflation, historically low interest rates should have supported gold price growth over the past year. Surprisingly, however, the precious metal did not follow the negative correlation that usually links it to Treasury yields, but simply moved in a very tight range.
In any case, and as we have pointed out on other occasions, you have to have perspective and not get carried away by emotions. Gold’s trajectory in 2021, although negative, is far from catastrophic and is far from a sign that a bearish cycle is beginning.
For most of the past year, the price of the metal has hovered between $1,700 and $1,900 an ounce , an average level higher than previous years, except for obvious reasons for the atypical 2020.
So, as Ronald-Peter Stoeferle , founding partner and portfolio manager of the Liechtenstein-based investment firm Incrementum AG , points out, there are at least five reasons to be confident that 2022 will be a good year for gold.
1.- Inflation will continue at high levels
Despite the fact that both the US Federal Reserve and the European Central Bank initially defended that the rise in inflation was temporary and caused by problems in the global supply chain after the pandemic, both Jerome Powell and Christine Lagarde have had to surrender to the evidence and recognize that it will continue to be high in the short term.
In addition, in the rise in prices, the growth in energy prices is not of decisive importance, since more than 80% of the products and services that make up the basket from which the CPI is calculated have registered inflation greater than 2.5%.
2.- The monetary policy of the central banks continues to be moderate
Another reason to be confident in gold through 2022 is that central banks are not going to have the ability to tighten monetary policy significantly.
As explained by Incrementum AG, this is due to the existence of a very high level of debt in the three sectors of the economy: the government, non-financial companies and households. Thus, the higher the debt, the greater the impact of the rise in interest rates on the debtors’ ability to pay.
Data from the International Monetary Fund for 2020 reveal that global debt grew by 28 percentage points that year, reaching 256% of GDP. The largest increase corresponded to government debt (+19%, up to 99% of GDP), but private debt, from companies and individuals, also grew significantly (+14%, up to 178% of GDP). GDP).
Therefore, the central banks will not be able to do more than change their monetary policy from ultra dovish to simply dovish, since further tightening would have serious consequences for the real economy.
3.- Real interest rates will remain in negative territory
As a consequence of the above, the central banks will not be able to tighten their monetary policy too much, which will limit the rise in interest rates, for the reasons explained in the previous point.
This implies that real interest rates (nominal rates minus inflation) are going to remain in negative territory for longer than the most pessimistic thought possible.
A negative real interest rate environment is just right for a gold rally to start.
4.- Inflation above 4% will harm the stock markets
Stock markets around the world are overvalued, thanks in part to liquidity injections approved by governments and central banks to revive economies after the pandemic. Therefore, when the time comes for this bubble to burst (as it already did with technology stocks in the early 2000s), gold will benefit.
On the contrary, gold has proven to be an excellent element of investment portfolio diversification during this time: in the 20 worst weeks of the S&P 500 since the year 2000, gold has averaged an appreciation of 0.2%, compared to significant falls in the rest of the assets.
5.- Gold is relatively cheap
After two years of well-above-average revaluations (+18.9% in 2019 and +24.6% in 2020), including a record high in August 2020, gold has taken a breather.
In the year of the pandemic, gold performed exactly as expected of a safe haven asset, shielding investors from the crisis that hit the global economy.
In light of all these figures, it seems difficult to think that the gold rally will end. For the past six years, his pace has been two steps forward and one small step back. If it stays the same, 2022 and 2023 are going to be very positive years. Also, keep in mind that all the favorable factors are still in full force.
