Gold prices likely to remain firm despite Fed’s tightening in 2022

By Ruchit Purohit

Gold prices are expected to remain firm in 2022, despite the US Federal Reserve announcing a roadmap to tighten its loose monetary policy and signalling three rate hikes during the year. Physical demand for gold and the central banks stocking up the yellow metal will also extend support to the prices in 2022. The MCX Gold contracts have continued to hold ground even after the Fed’s announcement, and it is likely to surpass Rs 55,000 on supportive factors over the next 12 months, said analysts.

Experts are of the view that the softening of gold prices will be limited in 2022 as the US Federal Reserve has ‘already announced’ the rate hikes. As is seen in the past, typically, the prices remain under some pressure in the months leading up to a Fed tightening cycle and later significantly outperform in the months following the first rate hike, said the World Gold Council. Further, elevated inflation coupled with market pullbacks is likely to sustain the demand for gold as a hedge during the period. According to the World Gold Council, gold has historically performed well amid high inflation. In years when inflation was higher than 3%, gold prices increased 14% on an average.

Speaking to FE, Somasundaram PR, regional CEO, India, World Gold Council, said: “There is strong expectation of rate hikes, which have been factored in but there is high inflation, too, accompanying the rate hikes. So the question remains if real rates will continue to stay lower, which will favour gold. Furthermore, geopolitical factors are another aspect that one should keep an eye on in the ongoing year. Overall, there are a multiple set of factors beyond just rate hikes that will have an impact on gold in 2022.”

Previously in 2021, metal prices have corrected around 4% after a sharp rally in the preceding year, mainly due to the shift of asset allocation to riskier assets amid double-digit returns, and liquidation of gold ETFs. In 2020, the gold prices scaled record highs on pandemic push and ample liquidity in markets. As a result, investors secured returns of over 27% during the period, data from Bloomberg shows. MCX Gold made a record high of Rs 55,922, and the Gold Spot scaled above $2000 in August 2020.

Going forward, alongside interest rate hikes, volatility in the US dollar, bond yields, and successful vaccination drives can hurt the metal prices in 2022. Navneet Damani, VP – commodity & currency research, Motilal Oswal Financial Services, said, “Volatility in US dollar and yields is also an important factor which could cap some gains for metal prices. Optimism regarding global growth and successful vaccination drives could also weigh on bullions. ETF and CFTC have not been supportive in the past year and if the same trend continues, it could further affect the market sentiment.”

He said domestically, gold, on a quarterly basis, could see targets of Rs 50,750 followed by Rs 52,500, with supports at Rs 47,850 and Rs 46,400. Keeping the above variables in mind, buying on dips strategy can be continued and an extended rally can be seen around Rs 55,000 over the next 12 months, he added.

Post the pandemic, experts maintain, gold remains an important asset class among investors and central banks. Not expecting the gold to outperform various other asset classes, they believe, co-existence will remain a significant possibility. “Central banks, particularly RBI, has continued to show interest in buying gold post the pandemic period amid bloated balance sheets and their belief in asset allocation. Additionally, CBDTs can compliment gold at some point,” Vikram Dhawan, head – commodities and fund manager, Nippon India Mutual Fund, told FE.