Does gold in the beginning of 2022 remind us year 2021? What about inflation this year?

The start of 2021 wasn’t successful for gold: after a few days of rally, the yellow metal entered a bearish trend. 2022 looks uncomfortably similar.

So far, so good – the first three days of 2022 didn’t bring a new catastrophe. It’s probably just the calm before the storm, but the new year started well. Even the price of gold has risen! As the chart below shows, the yellow metal managed to jump above the key level of $1,800 at the very end of 2021, but it still maintains its position (at least as of early January 3, 2022).

It reminds me of the beginning of 2021. Gold also started last year with a bang, only to plunge later. Its price increased 3.5% during the first week of the year, reaching $1,957, and then began its big downward move. As the chart below shows, the yellow metal plunged below $1,700 at the very end of March.

Hence, although January is historically a good month for gold, it might be too early to celebrate, and investors should exercise caution. However, luckily for gold bulls, there is one significant difference between 2021 and 2022. Last year, there were Georgia runoffs and Democrats took over both the White House and the full Congress (the House and the Senate). That was when the blue wave plunged the yellow metal.

This year should be politically calmer for the US (so, we don’t count the odds of Russia invading Ukraine and China attacking Taiwan), but the major threat to the gold market remains the same: a rise in the real interest rates. In January 2021, it was the blue wave that triggered a rebound in rates, but it may be induced by many more factors in the future. It could be the development of a new cure against coronavirus and the end of the pandemic, a more hawkish Fed, or a decline in inflation.

The spread of the Omicron variant keeps worries alive. After all, as the chart below shows, the 7-day rolling average of COVID-19 cases in the United States has hit a record high of about 405,000. When we are completely back to normalcy, risk appetite and bond yields may increase.

Another risk for gold is the stabilization of inflation and even subsequent disinflation. As the chart below shows, we got a one-off boost in the money supply, so inflation is likely to peak this year. Inflation expectations should ease then, and real interest rates may rebound in such a scenario.

What gives me some comfort here is that the pace of money supply growth hasn’t returned to the pre-pandemic level yet, but it stays at an elevated level (although much below the peak). It should support high inflation this year. Moreover, the Fed is likely to remain behind the curve and the peak in inflation may only strengthen the dovish camp within the FOMC (although investors should remember that the composition of the voting members of the Committee has become more hawkish in 2022).

Implications for Gold

What does it all imply for the gold market? Will the yellow metal resume its long-term bullish trend in 2022? Well, this is what a majority of investors that took part in Kitco News’ annual outlook survey believe. Of nearly 3,000 retail investors, 54% said they see gold prices above $2,000 by the end of the year. This is also in line with Goldman Sachs’ call for gold in 2022.

Other forecasters see gold prices trading in a range between $1,800 and $2,000. It’s certainly a possible scenario. After all, much of the Fed’s tightening cycle has already been priced in; and the last time gold bottomed was in December 2015, just around the first hike in the federal funds rate after the Great Recession.

However, I expect more volatile trading with strong downside potential. As a reminder, my educated guess is that gold may plunge at some point amid a rebound in bond yields, but will rise later as worries about the next economic crisis accumulate.

Indeed, it’s quite funny, but I haven’t even finished this article, and the price of gold has already started to slide amid rising US dollar index and Treasury yields, in line with my warnings from the beginning of this text. This is how I became a prophet. Now I can see that as soon as you finish reading this article you will continue surfing the internet!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Arkadiusz Sieron

Hi, my name is Arkadiusz Sieroń. Call me a liar, but I am writing about the precious metals thanks to Arthur Laffer, Alan Greenspan, John Keynes and Fredrich Hayek. Really! Would you like to know how these economists, some of whom have been dead for a long time, triggered my adventure with gold? When I was in high school, I took part in the Entrepreneurship Olympic, one of the biggest thematic competitions for pupils from secondary schools. During my preparations, I studied an academic textbook, in which I came across a Laffer curve. Eureka! If the tax revenues are the same at low and high tax rates, the government should lower them! I did not win the competition, but I achieved much more. I decided to become an economist! And I loved the idea of small government and economic freedom since that very moment. After graduating from high school, I moved to the capital. I was very excited, as I started to study economics at the best economics university in the country. However, the professors disappointed me very quickly. Why? They all were statists, supporting extensive government intervention and fiat currencies. Gold? It is a barbarous relic! Have you not read Lord Keynes? I was very depressed. I even considered giving up my studies in economics and enrolling in the Philosophy Faculty! You can see now that I was really desperate. When I was contemplating nothingness and vanity of vanities, a few of my classmates lent me a handful of fascinating books, such as Capitalism and Freedom by Milton Friedman. I also discovered the publications of the Austrian economists who supported the idea of the gold standard. It sounded crazy in the 21th century, but it was inspiring. I rediscovered the sense of studying economics. I continued my studies and one day I read these words: “Gold and economic freedom are inseparable”. Try guess who wrote them. Don’t give up, try once again. Don’t know? Alan Greenspan. Shocking, right? This is a quote from his “Gold and Economic Freedom”, an article published in 1966. Several years before he became the Fed Chair, and several more before the real estate bubble, that he helped to pump, up burst. Quite ironic, don’t you think? Both his essay and the Great Recession (and the accompanying bull market) motivated me to study investment portfolio management and the precious metals. I became a certified Investment Adviser very soon and I started to work for the biggest pension fund in the country. My corporate career seemed to be very promising. However, I quickly discovered that the company invested most of the participants’ funds into Treasuries or shares of the big state companies. And they didn’t even want to hear about investing in precious metals. I quit. I found a shelter at the university, as a Ph.D. candidate and – after a defense of my thesis about certain negative consequences of inflation (i.e. the Cantillon effect) – as an Assistant Professor. I was finally free to study economics, freedom, and gold. The more I read about gold, the more I was terrified. Most of the so-called experts who write about the precious metals, don’t have any idea about the subject they discuss. They treat gold as a mere commodity. Or they claim that gold is either worthless as it does not bring any yield or that its price should always rise. I was really let down by the state of understanding of the gold market among the analysts and investors. But I could not do too much. Until the sun shined down on me. I got a job offer at Sunshine Profits. I didn’t hesitate a second and accepted it, although many professors discouraged me: “You are a scholar, focus on science and do not write silly newsletters about bullion" -they advised me. But I did not listen to them, as they clearly didn’t understand the nature of gold. It is not a barbarous relic, it is the longest used money in history, and a clinking witness of human civilization. Gold is the asset, which used to serve as the safe- haven and portfolio diversifier for investors from the entire world for years. I wanted to study its properties and to share with my knowledge with people who do not have time for that. I wanted to help investors to better understand fundamentals of the gold market and improve their investment decisions. I’m happy that I can do that at Sunshine Profits. I’m really proud to be a member of our team and provide investors with high quality investment analyses about the gold market.