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Could this be gold’s year to shine?

The metal has historically performed well in periods of high inflation.
Image: Chris Ratcliffe/Bloomberg

For gold bulls, these are frustrating times. In rand terms, gold bumped up a mere 4.1% in 2021, but dropped 4.3% in US dollars.

Investors lavished with triple digit returns in cryptos may find this rather unappealing, but gold tends to do well in times of higher inflation, such as is expected in 2022.

The Gold Outlook 2022 report from the World Gold Council gives a glimmer of hope to those holding, or planning to acquire, gold in their portfolios.

“Gold has historically performed well amid high inflation. In years when inflation was higher than 3%, gold’s price increased 14% on average. Further, in the long run, gold has outpaced US inflation and moved closer in pace to money supply, which has significantly increased in recent years,” says the report.

The US Federal Reserve has indicated that it may hike interest rates three times this year while reducing the size of its balance sheet, but the World Gold Council cautions that previous cycles where interest rates were hiked ended up being less aggressive than originally expected.

“Financial market expectations of future monetary policy actions – expressed through bond yields – have historically been a key influence on gold price performance. Consequently, gold has historically underperformed in the months leading up to a Fed tightening cycle, only to significantly outperform in the months following the first rate hike,” adds the Council.

Gold price graph

Other central banks are less enthusiastic about raising interest rates, which could support a stronger US dollar. Steady or decreasing interest rates may underpin gold demand across the world.

The council warns that inflation may linger a while longer than expected due to Covid-related supply chain disruptions, tight labour markets resulting in more people leaving their jobs for better paid opportunities, high commodity prices and higher average savings which have contributed to lofty valuations in various financial markets.

Stock market pullbacks remain a risk as new Covid variants manifest in an environment of rising geopolitical risks and frothy equity valuations incubated in an ultra-low interest rate environment.

Gold is likely to face headwinds from higher nominal interest rates and a potentially stronger US dollar in 2022. Offsetting these headwinds are high, persistent inflation, market volatility linked to Covid and geopolitical events, and robust demand from sectors such as central banks and jewellers.

Listen to Simon Brown’s October 2021 MoneywebNOW interview with Chantal Marx of FNB Wealth and Investments as they talk gold:

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