2021 will be remembered as the year of the return of inflation and gold’s unsatisfactory reaction to it. Everyone assumed 2020 would be a bad year for trade, but would things return to normal in 2021? We haven’t entirely returned to normal yet. After all, the crisis is far from ended, as new coronavirus strains developed and expanded last year. In fact, 2021 was worse than 2020 in certain ways. The pandemic was causing devastation two years ago. Last year, both the epidemic and inflation were at their peak.

COVID has returned in 2022, and it is everywhere. Fortunately, vaccinations, treatments, increasing immunity, and Omicron’s lower inherent virulence appear to be reducing terrible consequences. Having said that, the Omicron rise is a significant negative risk to the near-term forecast.
Gold prices must have risen significantly in light of the biggest inflation rate since the Great Stagflation, right? No, not exactly. As the data below illustrates, 2021 was not the finest year for gold. Over the last year, gold has lost over 5% of its value.

What exactly occurred? In terms of macroeconomics, the economy recovered last year. As vaccination progressed, sanitary limitations were eased, and risk appetite returned to the market, causing safe-haven assets like gold to suffer. Furthermore, a resurgence in economic activity and increasing inflation spurred the Fed to cut its quantitative easing programme and adopt more hawkish rhetoric, causing gold prices to fall.

The New Year has begun with a significant increase in longer-term interest rates. Recent economic figures have fueled anticipation for the FED to move more aggressively. The Fed’s more aggressive tone in the FOMC minutes from December set the tone for financial markets in first week of January, overshadowing the record increase in COVID infections.

The December jobs report was both disappointing and perplexing. Nonfarm employment increased by significantly less than predicted, with firms adding only 199K jobs. The household employment numbers, on the other hand, showed yet another significant increase. The number of employed people increased by 651K. The jobless rate has dropped to 3.9 percent.
The disappointing hiring figures helped shore up demand for bullion as a haven. At the same time, wage gains and a drop in the jobless rate fanned inflation concerns, adding to bets that the Federal Reserve may raise rates as early as March.
Slightly weaker-than-expected ISM manufacturing and services surveys, as well as a bigger trade imbalance, indicate that supply-chain concerns were lessening prior to the Omicron rise.

Gold’s difficulty appears to be continuing this year, at least in the opening months of 2022, as the Fed’s increasing cycle and rising bond yields put downward pressure on gold. However, when the Federal Reserve of the United States begins to raise the federal funds rate, gold may find a bottom, like it did in December 2015, and begin to appreciate again.

The expansion of Basel 3 requirements for banks to maintain a net stable funding ratio on January 1, 2022, will put greater pressure on banks to either 1) hold more physical gold to cover their gold liabilities owed to customers, or 2) reduce their willingness to sell short gold through derivatives contracts (effectively creating “paper” gold out of thin air). Some of this transition in gold activities in banks has already occurred, but it will become more widespread in 2022. Expect higher prices if this leads in a decrease in gold short sells and/or an increase in demand for actual gold.

To the extent that interest rates might rise in 2022, whether or not sparked by forecasted actions of the Federal Reserve, business profits will decline. This would put downward pressure on stock prices. As more investors seek to leave the stock market to reallocate into safe-haven assets, look for higher gold and silver prices.
President Biden is viewed as politically weak by Chinese and Russian leaders. As a result, they are escalating their ongoing economic war with the United States by threatening military action. This might include China attacking Taiwan and Russia entering Ukraine. Russia may be attempting to divide the Western bloc, with the United States and the United Kingdom on one side and the European Union on the other. Whether or not actual military activities take place, tensions may rise, scaring even more people into trying to convert their fiat currency into gold and silver.

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