A new year has just begun, and it’s time to leave 2021 behind and look ahead. The past couple of years have left their mark on many of us, and here’s to hoping that 2022 will be a “quieter” year.
Last week, we looked at why we think silver is a strong opportunity in 2022, and today we’ll dive into gold.
Silver is mainly an industrial metal that is driven by supply and demand in industries and, to a lesser extent, by demand due to monetary reasons. Gold, on the other hand, is primarily driven by monetary factors. While Wall Street is telling you that gold is a commodity like corn or oil, about 20% of all gold ever mined is held by central banks worldwide, who are treating it as a “real money reserve” in their balance sheets. To talk about gold’s prospects, we have to consider what is going on in the economy.
What are the primary economic concerns for this year?
A recent poll by CNBC shows that investors fear inflation the most in 2022, and their concerns were just re-enforced as inflation for the year ending December 2021 hit 7%. At the same time, there is growing uncertainty around the stock market, especially considering that the Fed is likely going to aggressively taper its monetary policies. They will do so by pulling back on its $120 billion monthly bond buybacks, and since this won’t be enough — as we wrote here a while ago — the Fed has signalled that they will also be raising interest rates a few times during 2022. The cumulative effect of both actions will be like pouring cold water on the hot stock market.
Our dollar’s status could also be in danger. Record federal deficits and rising inflation erode both the purchasing power of the dollar and the confidence in the greenback globally, which could jeopardize the dollar’s status as the world’s reserve currency and send our currency tumbling if countries and businesses decide to ditch the dollar for a better alternative.
There’s also the risk of another coronavirus variant sweeping the US and the rest of world, which could force the economy to shut down yet again or just continue to disrupt the economic rebound like the recent Omicron variant.
With these concerns in mind, it’s no surprise that the demand for assets that can help mitigate investment risk could soar, and for 5,000 years that is exactly what gold has been doing: serving as a stable store of wealth and mitigating investment risk.
What could these risks mean for gold in 2022?
According to David Lennox of fund management company Fat Prophets, gold could reach $2,100 per ounce in 2022. In an interview with CNBC, he pointed to rising inflation and said that everything seems to be in place for a dollar decline, which would be a “boon” for gold.
“We do believe that high momentum in inflation and that lower U.S. dollar is going to drive the gold price higher in 2022.”
David Lennox, Fat Prophets
He added that if the conflict between Russia and Ukraine escalates, the price of gold could rise rapidly as fear for geopolitical turmoil will send investors running to the safe-haven asset.
RBC Capital Markets says gold could average $2,024 in 2022 if inflation takes hold and the economy underperforms expectations. This would be “a much more risk-off outlook,” which is an environment where investors reduce risk by selling riskier assets and seeking protection in safe-haven assets.
FX Empire adopts a slightly more bullish view of where gold is headed in 2022, saying it could reach $2,280, based on a technical analysis of the performance of the precious metal.
Central banks’ gold reserves hit 30-year high
Another word or two about central banks: The total amount of gold held by central banks reached 36,000 tons in 2021 — its highest level since 1990, according to a report by the World Gold Council. The WGC attributes the central banks’ switch to gold to the decline of the dollar caused in large part by the Fed’s massive money printing.
History suggests that central banks are likely seeking out gold because the precious metal, unlike the dollar, is mostly free from counterparty risk, which means it’s significantly less affected by turmoil in the financial markets and the economy than other assets.
Are you prepared?
No one knows when the next stock market crash or financial crisis will happen, which is why taking steps to protect yourself and alleviate your financial risk is always important.
In 2021, we just had the general risk of a recession or financial market crash that would have severely impacted retirement nest egg, but in 2022 we have a real financial foe working against you as inflation consistently chips away at how far your savings go.
I believe that these two forces — the general need for diversification that savers and investors have, which always is bullish for gold when stock market fear grows, and the real problem of the erosion of purchasing power by inflation — are bullish for the price of gold in 2022 and explains analysts’ general consensus that it is on its way up.