International Forecaster Weekly


There are a number of interesting and useful findings and projections in the World Gold Council’s “Gold Outlook 2022” released yesterday, particularly for precious metal investors.

Here are some highlights excerpted from the report:

Guest Writer | January 14, 2022

By Dave Allen for Discount Gold & Silver

There are a number of interesting and useful findings and projections in the World Gold Council’s “Gold Outlook 2022” released yesterday, particularly for precious metal investors.

Here are some highlights excerpted from the report:

Real Interest Rates Will Remain Low

“Near term, the [2022] gold price will likely react to real [interest] rates in response to the speed at which [the Fed and other] global central banks tighten monetary policy and their effectiveness in controlling inflation.

Yet, in our view:

  • While rate hikes can create headwinds for gold, history shows their effect may be limited;
  • At the same time, elevated inflation and market pullbacks will likely sustain demand for gold as a hedge;
  • Jewelry and central bank gold demand may provide additional longer-term support;
  • Finally, while there’s a lot of emphasis on the relationship with U.S. interest rates, gold is a global market. And not all central banks may move as quickly as the Fed.

For example, the European Central Bank has stated that it is ‘very unlikely that interest rates will rise in 2022’ despite recent record inflation prints. 

And while the Bank of England increased interest rates in December, its Policy Committee seemed to indicate only modest future rises.

The Reserve Bank of India has also signaled that it will maintain its accommodative monetary stance to revive and sustain economic recovery and mitigate the impact of COVID. 

And the Bank of China cut one of its policy rates by 5 basis points in December shortly after lowering the required commercial banks reserve ratio to cushion the country’s economic slowdown.

Why Inflation Will Remain High

We believe there are multiple reasons why inflation will remain high, partly stemming from the unprecedented monetary and fiscal policies put in place to alleviate the effects of the pandemic. In particular:

  • Lingering supply-chain disruptions and subsequent dislocations as new variants continue to emerge;
  • Tight labor markets, which, combined with COVID fatigue, have increased the number of people voluntarily looking for new, better-paid opportunities;
  • Higher average savings from 2020, which have contributed to lofty valuations in various financial markets; and
  • High commodity prices.

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 inflation and moved closer in pace to money supply, which has significantly increased in recent years.

Real (Inflation-Adjusted) Rates Will Likely Remain Low 

Despite potential rate hikes by some central banks, nominal rates will remain low from a historical perspective. 

Even more so, elevated inflation will likely keep real rates depressed. This is important for gold, since gold’s short- and medium-term performance tends to often respond to real rates.

[And real rates] combine two important drivers of gold performance: “opportunity cost” and “risk and uncertainty.” 

Further, low interest rates – both nominal and real – are shifting investment portfolios more towards risk-on assets. 

And this, in turn…increases the need for a high-quality liquid asset like gold. 

Equity Pullbacks Good Reason to Own Gold

Pullbacks [in stock markets] are likely to continue in the face of the seemingly endless stream of new variants, as well as simmering geopolitical tensions and overall buoyant equity valuations fueled by a long-lasting ultra-low-rate environment. 

In this context, gold can be a valuable risk management tool in an investor’s arsenal. 

Gold has a proven historical record of mitigating the negative impact of equity market pullbacks in periods of systemic risk.

Central Banks Like Gold 

Finally, central bank gold demand, which rebounded in 2021, may remain an important source of demand. 

There are good reasons why central banks favor gold as part of their foreign reserves which, combined with the low interest rate environment, continue to make gold attractive. 

This was also evidenced by the fact that two developed market central banks last year joined the list of buyers which has been dominated by emerging market banks since 2010.

Gold Will Depend on Which Factors Tip the Scale

Gold will likely face two key headwinds during 2022: higher nominal interest rates [and] a potentially stronger dollar.

However, the negative effect from these two drivers may be offset by other supporting factors, including high, persistent inflation, market volatility linked to COVID, geopolitics, etc. [and] robust demand from other sectors such as central banks and jewelry.

Against this backdrop, gold’s performance during 2022 will ultimately be determined by which factors tip the scale. Yet, gold’s relevance as a risk hedge will be particularly relevant for investors this year.”