Gold is a sought-after asset because it is a great means of protecting savings from depreciation. However, the past year was not entirely good for yellow metal. Gold prices hovered in the $1780-1800 range. For the year, precious metal fell in price by 5% - from 1887.6 to 1794.3 dollars. As a rule, a high inflation rate should positively affect its rate. Therefore, many analysts were confident that rising consumer prices and low interest rates in 2021 would play in favor of the yellow metal. Gold has always enjoyed increased demand during periods of economic downturns. However, this did not happen in 2021. Investor interest turned to risk assets - securities and cryptocurrency, and did not decrease even against the background of accelerating inflation and new waves of the pandemic.
Gold market participants learned two important lessons in 2021: not to count on inflation alone and to consider the Fed's plans. The rise in the inflation rate prompted the regulator to tighten monetary policy and accelerate the reduction of the quantitative easing program. Therefore, the yield on short and medium-term bonds rose, which put downward pressure on gold quotes. Inflation expectations peaked in November. That means inflation fears have taken a little bit of a turn down, with investors believing in the U.S. central bank's ability to contain upward price pressures.
Favorable and unfavorable factors in the gold market
In the first half of 2022, you should not expect an upward trend in the gold market, but then there may be hope for a rally. At the moment, the main macroeconomic factors do not support yellow metal.
Tedros Gebreisus, head of the World Health Organization, said the coronavirus pandemic will end this year despite the rapid spread of the omicron strain. In 2021, a large-scale vaccination campaign began, which raised hopes of overcoming the pandemic in the near future. This, in turn, will lead to the return of normal living conditions of the population and an increase in demand, as well as the recovery of the global economy.
The inflation rate is likely to decline. Currently, the easing of quarantine restrictions has contributed to the restoration of the growth rate of production and supply chains. To quickly overcome the consequences of coronacrisis, the authorities will tighten fiscal policy. The Fed will stay on an aggressive monetary policy course for a long time to ease inflationary pressures.
Real bond yields will rise. The US dollar could strengthen against the euro as the European Central Bank (ECB) pursues a less aggressive monetary policy than the Fed. ECB economists unanimously believe that in 2022 consumer inflation in the European Union (hereinafter - the EU) will exceed the target of 2%. The rate of inflation growth will increase due to secondary risks, that is, the consequences of taking measures to reduce the initial risk. All members of the ECB's Governing Council agree that it is too early to talk about raising interest rates. If rates are increased, then some EU member states could be hit by a debt crisis.
There are a number of factors that can contribute to the growth of gold this year.
Financial markets recovered quickly after the pandemic began. However, the most depressing factor for the financial sector may be the tightening of monetary policy by central banks.
The emergence of new coronavirus strains will increase the degree of uncertainty regarding the prospects for the global economy and the pace of its recovery. In the medium term, there may be a significant correction in stock markets and downward pressure on the group of high-yielding currencies will increase, which will increase demand for gold. Experts are optimistic about gold. If the price of precious metal rises to $1835 in 2022, then its further breakthrough to the level of $1850 is possible.