The gold market is looking forward to what the US Federal Reserve will decide on interest rates. At the moment, the short-term and longer-term prospects of bullion depend on the plans of the regulator.
All investors' attention in the next 2 days will be focused on the Fed's monetary policy meeting. The meeting, at which the central bank may announce an acceleration in the pace of reducing asset purchases and raising interest rates, starts today.
Before an important event, the precious metal is stuck in a narrow price range again. At this stage, uncertainty about the Fed's future course is the main deterrent for gold.
Traders are being extremely cautious in the precious metal market, even despite the increased coronavirus risks. Yesterday, the first fatal case from a new strain of COVID-19 became known. The fatal outcome of the disease was recorded in the UK.
"On Monday, gold felt a little support from increased concerns about the Omicron strain, but still remained below $1,800, within the range in which it has been actively trading over the past few weeks," analyst Craig Erlam said.
The yellow asset ended yesterday's trading with a slight increase, rising by 0.2%, or $3.50, which allowed it to reach a 3-week high of $1,788.30.
Thus, gold showed a rise already following the results of 2 consecutive sessions. Last Friday, the asset rose by 0.5% after the US government reported that the annual inflation growth in November reached the highest level in almost 40 years.
Record high inflation provoked an increase in demand for a safe haven asset. In addition, a sharp jump in prices has increased expectations that the Fed will accelerate the reduction of stimulus measures in the near future in order to start raising interest rates as soon as possible.
Gold has been under intense pressure from the Fed's hawkish rhetoric for most of 2021. However, the market has now reached a turning point. Paradoxically, the prospect of raising rates no longer scares the precious metal.
Traders expect that the first increase in interest rates will occur in June, and the whole process will take place in 4 stages. Nevertheless, many experts believe that real yields will remain low next year despite the Fed's repeated rate hikes. This is a positive moment for the precious metal, which can push it up.
Analyst Ole Hansen stated that the most significant factor that will stimulate gold is rising prices. He added that no matter how many times the Federal Reserve raises interest rates next year, they are unlikely to be ahead of the inflation curve. According to him, if the central bank tries to get ahead, it will lead to another recession, which is a favorable environment for gold.
The expert admitted that he is optimistic about the prospects of the yellow asset in 2022, despite the fact that its indicators disappointed investors this year. According to preliminary estimates, the precious metal lost 6% of its value during 2021.
"The current price movement, apparently, represents some consolidation compared to the growth of almost 25%, observed in 2020," - O. Hansen said.
Wells Fargo analyst John La Farge also sees great growth potential in bullion next year. However, he believes that not only inflation and the associated confusion of the Fed will help gold.
"Regardless of what interest rates will be next year, the growing supply shortage will lead to an increase in commodity prices, including gold," - he predicted.
J. La Farge explained that insufficient investment in the mining sector in 2021 led to a large shortage of supply in the market, and this will not be easy to fix even in the long term.
Wells Fargo currently expects gold prices to rise to $2,000 in 2022. However, not all analysts share such optimism about gold. For example, Capital Economics commodity strategies expect prices to fall to $1,600 by the end of next year.
"We think the yield on short-term Treasury bonds will rise slightly over the next few years, with less growth in long-term yield. Given that the price of gold is more responsive to changes in long-term real yields, we remain confident that a gradual increase in this indicator will lead to a decrease in the value of the precious metal to $ 1,600 by the end of 2022," analysts said.