Will 2022 be the year of gold or the US dollar?

Will 2022 be the year of gold or the US dollar?

2023-05-29 • Updated

Two issues will determine who will have the upper hand in 2022: gold or the US dollar.

The first is the Fed's strict schedule for ending its monthly bond-buying program and the possibility of it raising interest rates twice during 2022. But, on the other hand, we have the rising inflation that's starting to spiral out of the Fed's control.

Gold Outlook: What will drive gold in 2022?

Gold has strong drivers next year that may enable it to regain the bullish trajectory after consolidating since reaching its highest levels in August 2020.

1. Inflation

The dollar's strength in the face of expectations of rate hikes has been one of the obstacles to gold this year. Now, we must accept that inflation will not fall as quickly as the markets expect. Even if inflation is transitory, it will stick for longer than expected until circumstances return to normal and the shortage of workers and supply chains problems end.

Next year's main drivers for gold will be the negative interest environment, expectations of high inflation, and a weaker dollar in the first half of 2022.

 2. Low-interest rates

Gold will benefit from negative real interest rates, which will not disappear even as the Federal Reserve ends its bond-buying program and raises rates twice next year.

Low-interest rates will remain a natural supporter for gold in the first half of 2022. In the coming year, the expected increases by central banks will not be enough to turn real rates positive. If the interest rate is raised twice as expected, it will remain low at 0.25% - 0.5%.

Compared to the current business cycle to previous cycles, the inflation figures are much higher and appear to be lasting. This should keep real interest rates in negative territory in 2022. The possibility of persistently higher inflation will increase hedging investments in gold in the short term.

3. Higher Lows and Bottoms

On the price action side, the general trend for gold appears to be bullish during 2022, as investors see higher lows in the longer term.

The trend of gold in the recent period forms higher bottoms every time it falls. If the inflation crisis worsens globally, this will undoubtedly support the surge of gold.

Gold consolidated since reaching its highest level in August 2020. If you watch the lows recorded by gold since 2018, you will see that these low levels gradually rise. This refers to a bullish trend.

4. Correction in the stock market

When Fed starts raising rates, volatility will increase in the US stock market. For example, the largest correction of the market in 2021 was 5%. Therefore, we may see a bigger correction next year, especially with some stocks already being overvalued. 

With growing volatility, some funds and liquidity may escape from the stock market to gold. Despite rising inflation, the strength of earnings and profits in stocks have attracted investors and snatched them from safe gold investments. 

5. Higher physical demand for gold 

Next year, the physical demand for gold is expected to rise with demand for jewelry rising by 5% year-on-year to 1920 tons, and central banks purchases within 480-500 tons.

The dollar is waiting for the second half of 2022

Gold will find support in the first half of next year as low rates and higher inflation proceed but will be met with bearish pressure later in the year when the Fed hike rates. 

As the ultra-loose monetary comes to an end and withdrawing the cheap money from markets, the support of the precious metals sector will drop in the second half of 2022. This support will go to the US dollar. 

In the end, several factors, including labor shortage and higher energy prices, have pushed inflation in the United States to its highest level in 40 years. However, gold didn't jump to historical levels as expected. This may make us believe that markets believe the Fed's narrative on transitory inflation and that it will control it. 

This is why gold has failed to take advantage of inflation. In addition, as the stock market continues to achieve record levels and substantial profits, investors prefer to put their money in a place they can get higher returns. Now, let's see if this changes in 2022.

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