Gold underperformed in 2021 and might do as well in 2022. So what are the main headwinds for the price of gold in 2022?
The price of gold has traded with a bearish tone ever since it made a new all-time high in the summer of 2020. Despite inflation surging to decade-high levels in 2021, gold failed to act as a hedge against it, as it did so many times in the past.
For this reason, many investors expect the price of gold to recover and outperform in 2022, closing the gap with inflation. While that may turn out to be correct, here are some headwinds for the price of gold in the year ahead: higher real interest rates, stronger US dollar, tightening cycles historically weighing on gold, and investors’ appetite for gold waning.
Higher real interest rates
A typical interest rate is made of the real interest rate plus four premiums – inflation, default risk, liquidity, and maturity. But when we talk about the US Treasury, known as a risk-free asset, all premiums are zero, with one exception – inflation.
Therefore, the real interest rate is the interest rate received after accounting for inflation. For example, inflation in the United States reached 7% YoY in December 2020, and so, for the real interest rate to be positive, the nominal interest rate must be higher than 7%.
It is not, but rising. Higher or increasing real interest rates raise the opportunity of holding gold since no cash flow is generated, and there is a cost to store it.
Stronger US dollar
The US dollar performance in 2021 against its peers was responsible for most of the gold price’s decline. As the Fed prepares to start a tightening cycle, the US dollar remains attractive to investors in 2022 as well.
Tightening cycles are a headwind for gold
Further downside risk for gold is expected from the Fed’s tightening cycle. To exemplify, the previous tapering in 2013 led to the price of gold falling by more than 35% – why should it be different this time around?
Investors’ appetite for gold to wane
Finally, the interest for “paper” gold or gold ETFs is waning. Last year holdings of gold ETFs in investing portfolios declined by 9%, or half of the accumulation seen in 2020. Further declines are likely as holdings remain high by historical standards.