Gold is set to close this year with losses, but there is still hope that 2022 will be a better time for the precious metal. According to the Perth Mint manager, there are three triggers in 2022 that may initiate a rally in gold.
At the end of the year, gold made a surprising move to please investors for the Christmas holidays. Amid low liquidity during the holiday season, no one expected the precious metal to develop a rapid movement. However, a 2-day decline was suddenly canceled as the price broke through the psychologically important level of $1,800.
The breakout happened in the middle of the week. As a result, gold closed yesterday's session with a gain of 0.8%, or $13.50, reaching the level of $1,802.20 per troy ounce.
The main driving factors for gold were the weakening of the US dollar and the decline in US Treasury yields. On Wednesday, the US dollar index dropped by 0.4% to 96.117. Meanwhile, the yield on the 10-year Treasury note fell to 1.46%.
The main pressure came from growing uncertainty around the possible impact of a new COVID-19 strain on the global economy.
Recent research shows that the risk of hospitalization among patients with the Omicron variant is lower than with the Delta strain.
Despite this, many countries around the world take precautions and introduce new restrictions to curb the spread of the virus.
Analysts predict that Omicron fears and its potential impact on economic growth will remain in focus of investors in the near term. If the new strain does manage to undermine the global economic recovery, it will raise doubts about the Fed's ability to stick to its hawkish plans on monetary policy.
This scenario is beneficial for the precious metal which is traditionally viewed by investors as a safe-haven asset in times of economic turmoil. In this regard, analyst Edward Moya believes that the long-term outlook for gold remains optimistic.
As for the near-term outlook, the precious metal is expected to trade in a narrow range: by the end of the year, its price will stay at $1,800 on average.
Despite impressive gains on Wednesday, gold is poised to end the Christmas-shortened week with a 0.1% decline. The results for the past 12 months are not encouraging either as gold is approaching its first annual loss in 3 years.
At the same time, Jordan Eliseo, an expert at the oldest Australian mint in Perth, thinks that there is nothing wrong with gold finishing this year in the negative zone. On the contrary, he views it as a good sign which gives hope for further growth of the metal.
To get a fuller picture of where gold is heading, the strategist suggests looking at the price dynamics in a broader context.
It is important to recognize that gold rallied nearly 70% between Q3 2018 and Q3 2020. "It went from under $1,200 an ounce to more than $2,000 an ounce in that time period, which was an extremely sharp move," Jordan Eliseo notes. He added that "gold performed incredibly well in the two years leading into late 2019. I think that this 15% pullback from the 2020 all-time highs needs to be put in that context."
According to the expert, the fall in the value of gold over the past 12 months is nothing more than a period of correction, "an entirely healthy, regular part of a longer-term bull market."
There are clear signs on the charts that the bull market is not over for gold yet. However, in addition to technical indicators, there are several triggers in 2022 that could push gold higher. Surprisingly, the factors that have been keeping gold back in 2021 could contribute to its rise in 2022.
Jordan Eliseo outlines three such factors:
Bearish sentiment
The general sentiment gauge points to a bearish outlook for gold in 2022. But it's actually a pretty good sign. If everyone is very bearish, then this is likely to have a positive effect on the price of the precious metal, Eliseo stated. "Plus, given where equity markets are priced, it's almost inconceivable that the 60/40 portfolio strategies will continue to return what they have over the last ten years. Investment managers that run these strategies tell their clients that the next decade will probably not be so rewarding for mainstream financial assets. That helps argue for portfolio allocations into gold."
Falling demand
In 2021, the physical gold market recovered after falling demand in India and China because of the pandemic. In addition, developed markets show more interest in gold now.
Thus, Singapore and Ireland are adding gold to their reserves. The global consumer demand for jewelry is also improving. "And when you factor in the additional buying of bars and coins in Western markets, the physical demand has been higher in the first three quarters of this year than it was in the first three quarters of 2019 prior to COVID hitting," Eliseo pointed out.
Rising inflation
In the second half of 2021, the spike in prices had a negative impact on gold as investors waited for the Fed to tighten its policy in response to record-high inflation. Now that the stance of the US regulator is clear, the precious metal will finally start to benefit from the growing inflationary pressure.
"If you look at gold in environments where inflation has been above 3%, the average return on gold in US dollars in any given year has been about 15% per annum," the Australian expert said. "It is very clear that the current inflationary impulse is going to be far stronger than what the Fed was anticipating only a couple of months ago." In this case, gold may again jump above $2,000 an ounce at the end of 2022 given that it is now trading at $1,800. This is a very possible scenario.