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2022 Outlook for Precious Metals

2022 Outlook for Precious Metals

The performance of gold in 2021 was somewhat surprising given that historically, high inflation has been a major driver for gold demand. In the US, inflation rose to 6.8% by the end of 2021- the highest it has reached since 1982. However, the gold price still ended the year 6.3% down.

Why did Gold Fail to Rally in 2021?

In the two years from August 2018 to August 2020, the gold price underwent an unprecedented 80% rally, from a low of $1,167 to a high of $2,089. Following this exponential rise, many analysts anticipated a period of consolidation, similar to the situation following gold’s breakout in 2004.

Furthermore, despite uncertainty around emerging COVID-19 variants, various geo-political tensions and increasing rates of inflation, the gold price was hampered by tapering, expectations of global recovery and rate increases at the end of the year. However, according to The World Gold Council, although rate hikes can create headwinds for gold, history shows that their effect may be limited. In fact, 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.

Outlook for 2022

Rising interest rates during the year are expected to have an impact on gold prices as traditionally it can lead to some investors choosing to transfer their holdings into assets that pay interest. Although the Bank of England increased rates in December, the Policy Committee suggested that future rises would be modest. Although some central banks will undoubtedly increase rates during 2022, nominal rates will remain low from a historical viewpoint.  Furthermore, elevated inflation rates are likely to keep real rates depressed for some time to come. It is also prudent to consider the other drivers for gold demand when considering what 2022 might bring for the yellow metal. 

Demand from jewellery consumption and central banks will also play a role, both of which showed positive signals in the latter part of 2021. Jewellery demand usually equates to around half of all gold demand and major markets like India were severely hit by COVID-19, while the lack of tourism income supressed demand in South East Asia – any rebounding of GDP and personal incomes in these markets may provide a significant tailwind for gold.

Furthermore, when reflecting on the past performance of gold, there appears to be potential for additional gains for the metal in 2022.  Following gold’s consolidation period in 2004 to 2005, the yellow metal experienced another impressive rise. If we experience a similar pattern this year, then 2022 could see a more bullish trend in the coming months.

“The current economic situation makes it almost impossible to predict what will happen to the price of gold, or other precious metals, in 2022.  However, at The Royal Mint we have started 2022 with strong investor demand for bullion coins and bars, as well as our physically backed digital options, such as DigiGold. For anyone considering whether to add to, sell or maintain their precious metals holdings in 2022, we recommend undergoing comprehensive research in the area and speaking to a financial adviser before making any significant decisions.” Andrew Dickey, Divisional Director for Precious Metals

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