Gold 2022 outlook: Return to trend with lingering upside risks

Here, we outline four macroeconomic themes that remain at the helm for gold’s 2022 outlook. Based on these themes, our base-case outlook sees gold returning to long-term trend levels with a potential boost to the upside.

Theme 1: Recovery in global growth may bolster cyclical gold sectors

The global reopening and economic recovery that began in 2021 is expected to continue in 2022 and lead to above pre-pandemic real GDP growth rates. Growth in the US has seen the quickest recovery from pandemic lows in 2021. Led by vaccine distribution efforts and fiscal stimulus, the US is forecast to grow 3.9% in 2022. Like the US, the European economy shifted from recovery to expansion last year as vaccine distribution increased mobility within the region. According to the International Monetary Fund, advanced European economies are forecast to expand to 4.2% in 2022.

In China and India — two of the key emerging economies for the gold market — signs point to further consumer recovery throughout 2022, potentially lending support for cyclical gold sectors (jewellery, technology and industrial fabrication) which account for the majority of annual gold demand. China could see 5.6% economic growth in 2022. Turning to India, a core economy for gold jewellery demand, growth in 2022 is expected to reach 8.5% as recovery from the pandemic resumes.

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Recovery in these four economies remains key for gold this year, as these are some of the most important markets for gold jewellery demand — particularly India, China and other emerging markets. Gold demand among jewellery and technology through 3Q2021 already matched full-year 2020 total demand in these sectors. Expectations for full-year 2021 gold cyclical demand to have returned to pre-pandemic levels are high, with this trend potentially continuing throughout 2022 as part of a base-case scenario outlook for gold.

Theme 2: Higher rate volatility with low real yields persisting

For 2022, a key factor of consideration for gold remains the path and speed of monetary policy among global central banks, particularly the Fed, which commenced tapering its asset purchases in November last year.

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Focusing on the expected timing of the Fed tightening cycle in 2022 may lead to higher overall volatility across markets. The previous Fed tightening cycle, which began at the end of 2015, illustrates that the Fed’s rate hikes are not necessarily bad for gold.

Between December 2015 and July 2019 (when policy shifted back to rate cuts), the Fed raised its funds target rate nine times from the range between 0%-0.25% to 2.25%-2.50%. And the gold spot price rose nearly 35% from US$1,061 to US$1,431 ($1,432 to $1,932) per oz during the same period. Investors should look beyond nominal policy rates and examine other factors such as real interest rates and/or the gold market’s supply and demand dynamics that may impact gold price movement. Rate volatility this year may be at hand, however. And with real yield levels likely to remain negative and low on a historical basis, the backdrop for gold remains overall accommodative.

Theme 3: Investor motivation driven by inflation risks and fiscal spending

Inflation will likely remain a growing risk for investors in 2022. Rising commodity and energy prices, global supply chain bottlenecks, and labour supply and demand mismatches are likely to persist and contribute to an elevated inflationary environment, particularly compared to the low inflationary regime of the prior decade.

US inflation numbers are currently running at multi-decade highs. Gold does keep up with price fluctuations over time, but historically it tends to stand out during extreme price levels as a potential store of value. In fact, over the last 50 years, gold has provided an average annual real return of 12.7% when US Consumer Price Index exceeded 5%, compared to negative returns on average for both US equities and bonds. Investors may seek to increase exposure to gold in 2022 in response to a new elevated inflationary backdrop.

Furthermore, global economies leaning on fiscal stimulus to drive post-pandemic economic recoveries may exacerbate inflation concerns. The potential long-term US dollar weakness may also be supported by the significant increase in US government debt since 2020. Given the US dollar’s historically negative correlation with the spot price of gold, performance will likely remain a driver for the gold price in 2022. The US dollar may find short-term support as the Fed seeks to tighten its monetary policy. However, over the longer term, as Europe and emerging markets close the gap to the growth recovery in the US and as US fiscal spending continues, the US dollar’s upside may be limited.

Theme 4: Mean reversion in risk assets may spur market volatility

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For 2022, the spotlight is on the significant run that risk assets have achieved in the past year. Equity market valuations remained broadly stretched with certain segments carrying lofty valuations, while market volatility broadly remained tame throughout the year. Additionally, low interest rate policies and increased liquidity from monetary policy continued to spur more risk-taking in fixed income and credit markets. Given the strong rally in financial markets in 2021, the potential for a cyclical correction, valuation-driven mean reversion, increased market volatility, or an exogenous tail risk, has increased in 2022.

Considering these major themes, we see three possible scenarios for gold’s outlook in 2022, with a slight upward skew reflecting the potential for upside surprises for gold.

• Base case: Our base-case scenario for gold has a 50% likelihood of occurring, with a potential trading range between US$1,800 and US$2,000 per oz. Under this scenario, the Fed hikes one or two times, real yields rise but remain negative on average for the year, and the US dollar remains flat. Additionally, global growth remains flat with jewellery demand reaching pre-pandemic trend levels. Volatility rises but remains moderate.
• Bull case: Our bull-case scenario for gold applies a probability of 30%, with a potential trading range between US$2,000 and US$2,200 per oz. In this scenario, real yields remain deeply negative as the Fed remains more dovish than expected, hiking no more than once, as inflation plateaus but remains elevated. Emerging market economies outpace US growth, spurring further pressure on the US dollar. Volatility rises significantly, driven by exogenous market shocks and tail events, which increases investment demand for gold and gold-backed ETFs.
• Bear case: Our bear-case scenario, with 20% probability, reflects a trading range sliding closer to pre-pandemic levels from US$1,600 to US$1,800 per oz. Under this scenario, the Fed begins tightening rates faster than market expectations (more than twice), but US growth remains strong. Volatility dampens while investors rotate into risk assets, pushing real yields dramatically higher. US outperformance versus the rest of world also supports a stronger US dollar, while emerging-market economic recovery stumbles, dampening consumer demand for gold jewellery.

Robin Tsui is APAC gold strategist, SPDR ETFs, at State Street Global Advisors

Cover photo: Bloomberg