Gold Outlook for 2022 by Mr. Chirag Mehta, Sr. Fund Manager-Alternative Investments, Quantum Mutual Fund

Highlights :

 

·        In the first half of 2021, gold consolidated from 2020 highs as successful vaccines and global economic recovery improved investor sentiment but got back in favour in the second half due to the firming of inflation and repeated Covid outbreaks.

·        gold prices in 2022 will be influenced by how inflation shapes up and central banks’ reaction to it.

·        Moving into 2022, US consumer inflation has hit a near 40-year high and the Federal Reserve finally dropped the word “transitory” from its inflation view as it remains terribly behind the curve.

·        Globally, financial conditions have always been sensitive to what the Fed does.

·        Debt levels in the US as well as globally have surged to historic highs.

·        Looking back at the taper tantrums of 2013 and 2018 suggests a tightening Fed isn't good news for markets.

·        As such, Indian investors will benefit from holding gold to protect their portfolios from possible equity market corrections.

·        The continued inflows into gold ETFs in 2021, is proof.

·        If inflation is persistent, which it will likely be, given the trillions of dollars of stimulus that have trickled down to the real economy, the pandemic-induced supply disruptions and the transition to cleaner energy, the Fed must aggressively hike rates.

·        Thus, as it prioritizes financial stability, it won’t be surprising if the Fed is forced to take a U-turn again.

·        Premature tightening of monetary conditions on the other hand come with risks of recession and market volatility which will keep gold relevant.

·        As the US Federal Reserve tightens its monetary policy, in India, it will trigger capital outflows, hurting the rupee. The depreciation in the rupee will support domestic gold prices.

·        Here economic growth, a wedding rush and pent-up demand signal robust consumer demand in 2022.

·        Central bank gold purchases can be expected to continue in 2022 as they hedge themselves against macroeconomic uncertainties and continue the trend of incrementally diversifying away from the dollar.

·        To summarize, between sticky inflation acting as a tailwind and the Fed’s tightening-induced stronger dollar taking a toll, gold because of conflicting forces is expected to stay range-bound in the first few months of the year