The yellow metal exchange rate is maintained at a high level due to inflationary risks and low economic growth rates. Gold shows resilience amid volatility in financial markets. Towards mid-January, the yellow metal rose significantly in price. Gold quotes rose from $1806 an ounce at the end of December to $1836 last week, strengthening above $1800. Various factors contributed to this. According to analysts, the growth of the gold exchange rate is caused by the resumption of investor interest in precious metal amid confidence in a consistently high level of global inflation, concerns about the spread of the omicron coronavirus strain, which reduces interest in risky assets, as well as due to the ambiguous policy of central banks. Gold was supported by capital outflows from risk asset markets. All these events activate purchases of precious metal.
In the US, the rate of consumer price inflation in December reached its highest level since 1982, and producer price growth is approaching 10%. German consumer prices rose 3.1% in 2021 - inflation hit a record high in nearly 30 years. Consumer price inflation in the UK accelerated by 0.3% on a monthly basis - from 5.1% in November to 5.4% in December, the highest since March 1992. At the same time, the inflation rate in Canada rose to 4.8%, which is a 30-year high. This situation will stimulate demand for such protective financial instruments as gold.
Investors are closely monitoring the Fed's actions, monetary policy of other central banks and analyzing economic data on the United States. Market participants expect messages from the US Central Bank regarding the reduction of the balance sheet and the sale of securities.
Patrick Harker, president of the Federal Reserve Bank of Philadelphia, predicts a tangible tightening of monetary policy in 2022. U.S. President Joe Biden last week said he supported the Fed chairman's decision to raise rates. Currently, some experts predict four waves of interest rate increases this year if inflationary pressure continues or intensifies. Christopher Waller, the US Fed governor, suggested a five-stage interest rate hike in 2022 was possible to curb rising inflation. Waller has previously announced a three-step rate hike. Fed Chairman Jerome Powell, in a recent speech, let slip the need for careful handling of inflation.
This means that there will be no major increase in interest rates and precious metal has an opportunity for growth. However, even if the Fed raises its key interest rate as soon as the near future, the real returns of long-term "treasurers" will remain negative, which will support gold. Experts note that the first interest rate increase has already been reflected in the price of precious metal. Overall, the Fed's aggressive stance entails certain risks for financial markets and the broader economy. Almost every tightening cycle in the past has led to an economic crisis. There was a four-step increase in interest rates in 2018. In 2019, however, the Fed sharply downgraded them. Currently, the key interest rate in the United States is 0-0.25%. According to the basic forecast of experts, it will grow to 0.75-1% by the end of the year. If the growth rate of consumer prices increases, then the interest rate will rise above the expected range.
Will gold rise in price?
In the future, the gold rate may rise, despite the Fed's tightening policy. There are ample grounds for optimism about the yellow metal in 2022, according to analysts at the World Gold Council. The organization's specialists assure that the Fed's monetary policy has not been too aggressive throughout history. Based on the latest economic reports on the leading countries of the world, inflation will increase, and precious metal in such conditions will increase in price. For example, in those years when inflation exceeded 3%, the cost of yellow metal increased by an average of 14% per year.
In addition, there are global economic risks associated with the "omicron" strain, which is spreading rapidly around the world. According to the World Health Organization (hereinafter - WHO), 72% of cases of coronavirus infection in the world at the moment are in the omicron strain. The population of the planet began to be infected with the coronavirus 20% more often. For example, in just 7 days - from January 10 to 16, more than 18 million people were infected in the world. Over the same period, coronavirus mortality increased by 4%. WHO expects that in the near future the number of new patients and mortality will increase. Investors could shift to buying gold amid concerns about the spread of the "omicron" strain.
The European Central Bank (the ECB) is expected to tighten monetary policy after the situation with the spread of the omicron strain normalizes.
Michael Langford, an analyst at the investment company AirGuide (USA), points out that there are geopolitical risks that can affect the attractiveness of gold. We are talking about instability in the context of geopolitical relations between Russia and the West, as well as the conflict between China and Taiwan. These events provide important support for the precious metal price rally. In any case, even if there is no significant increase in the gold exchange rate amid instability in the regions, the price of the yellow metal will remain near the current level until the situation regarding these conflicts becomes clear.
Analysts at the brokerage Oanda (USA) note that it is difficult for gold to exceed the resistance level of 1833 dollars. Positive points for the value of precious metal are mixed investor sentiment in financial markets and inflation concerns. There are attempts to buy gold to reduce risks. Owners of cash and low-yield debt instruments suffer from negative real returns, which have been observed for quite some time. Investors will begin to look for alternative ways to maintain their purchasing power. Gold is a more reliable asset and an instrument for hedging inflation risks.
Paul de Souza, vice president of investment company Sightline Wealth Management (Canada), believes that gold prices will skyrocket, but not in 2022. According to the expert's forecast, the precious metal rate this year will fluctuate in the range of $1700-1850. Rising gold prices are possible only in the event of a massive loss of confidence in the policies of central banks by investors. The soaring price of the yellow metal could also be due to the collapse of the derivatives market, Souza said. It is now that investors have a chance to replenish their portfolios with a reliable physical asset at an acceptable price.
Analysts at the financial company MKS PAMP (Switzerland) have published a forecast of gold quotes for the next 12 months. An optimistic scenario involves yellow metal prices rising to $1965, and a pessimistic scenario promises a drop in quotes to $1,675.
According to experts from the investment company Blackstone Private Wealth Solutions (USA), in 2022 the precious metal rate may grow by 20%. The yellow metal will rise in price amid investors turning to defensive assets in search of saving their cash from constant inflationary pressure.