By Naveen Mathur
Last year, spot gold experienced approx. 3.6% losses however, advanced to around $1,937 an ounce in the past three months and registered a 5.9% quarterly gain, the most since the three months to September 2020. There were a couple of catalysts for the rally. Russia-Ukraine conflict along with concern for global growth boosted safe-haven appeal.
Inflation: Getting hotter
US consumer price gains accelerated in February to a fresh 40-year high on rising gasoline, food and housing costs, with inflation poised to rise even further following Russia’s invasion of Ukraine. The Fed officials could take a more hawkish stance if energy shocks lead to higher and more persistent inflation, but they also may take a more cautious approach if sinking consumer sentiment and declining real wages begin to weigh on growth as the war drags on.
The Federal Reserve signalled it will reduce its massive bond holdings at a maximum pace of $95 billion a month, further tightening credit across the economy as the central bank raises interest rates to cool the hottest inflation in four decades. Many Fed officials have favoured 50bps at the March monetary policy meet.
Gold’s performance is linked to investments
Gold’s price behaviour was linked to investment demand, especially from gold ETFs. Gold’s performance was also linked to jewellery, technology and central banks. We believe that gold can still receive positive support in 2022 from key jewellery markets, such as India.
Finally, central bank gold demand may remain an important source of demand. There are good reasons why central banks favour gold as part of their foreign reserves which, combined with the low interest rate environment, continue to make gold attractive.
Short Outlook: Gold’s performance will depend on which factors drive the market
In our opinion, Gold will likely face some of the major key headwinds during 2022: Higher interest rates, Fed’s balance sheet reduction plan and a potentially stronger dollar. However, the negative effect from these drivers may be offset by other supporting factors, including: high, persistent inflation, inverted bond yield curve – a possible trigger for recession, market volatility linked to Covid-19, geopolitics, etc. Robust demand from other sectors such as central banks and jewellery will drive the trend. However, there’s a chance that further Chinese economic slowdown may limit the contribution from local gold jewellery demand.
Against this backdrop, gold’s performance during 2022 will ultimately be determined by which factors drive the market. Yet, gold’s relevance as a risk hedge will be particularly relevant for investors this year. Comex gold may fall to $ 1,870 an Oz in case $1,910 is broken with a support of volume. MCX Gold June may decline to Rs.50,500 per 10 gram in coming weeks.
Silver: Rallies on escalation of the geo-political risk
Spot silver slipped by more than 11% in 2021 nonetheless, in the first quarter of 2022, it rebounded by 6.39%, closed comfortably at $24.78 an ounce amid rise in the industrial and investment demand. Silver had followed the gold price – and indeed that of most precious metals – higher as Russian forces invaded Ukraine and investors sought safer havens.
Silver Institute: Global demand to rise by 8% in 2022
The rapid expansion of renewable energy as governments around the world increasingly commit to carbon emissions reduction is expected to lift silver demand for solar photovoltaic panels to an all-time high. Physical demand is expected to rise this year, potentially providing support for spot prices. The Silver Institute predicted that global demand could rise by 8% from 2021 to a record high of 1.112 billion ounces in 2022.
Investment demand for physical silver bar and bullion coins is expected to jump by 13% in 2022 to a seven-year high. Demand for silver to be used in jewellery is expected to rise by 11%. Demand in silverware is forecast to climb by 21%.
Outlook: Physical demand to underpin the sentiment
The ongoing macroeconomic uncertainty and high inflation prompt retail investors to increase their exposure to silver as a hedge and store of value and limit profit-taking. However, once the pace of US policy rate hikes becomes more evident, the price outlook becomes more challenging.
In the medium to long term, uncertainty should continue to dominate the headlines, with dollar strength expected, but not capable of limiting gains in silver. If Russian energy and food commodity supplies are halted, and global prices explode, the inflation expectation in the marketplace should finally ignite bullions, including silver for major upside extensions. MCX Silver May is expected to rise further to Rs. 68,500 per kg in coming weeks.
(Naveen Mathur is Director, Commodities and Currencies, Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own.)
