Page 9 - Bullion World Issue 9 January 2022
P. 9
Bullion World | Issue 09 | January 2022
Stagflation is not necessarily a
headwind to gold, and as inflation
eases from multi-year highs but
growth also slows, gold could be
prone to upside risk.
prone to further upside price risks. been reluctant to increase their Investor sentiment has started to
For the industrially biased precious exposure to gold, and a lack of turn more favourable, which bodes
metals (silver, platinum, palladium, conviction limited upside risk to the well for gold. Tactical positioning
rhodium, iridium and ruthenium), metal, this is now subsiding. has been relatively light amid low
we see upward momentum as conviction; ETP holdings have fallen
supply-chain challenges ease amid Amid rising prices and growth for most of the year and are down
constructive demand. slowdown concerns, fears of around 200 tonnes for 2021, the
stagflation have weighed on gold. largest annual net redemption since
Gold has faced headwinds in 2021 While low-interest-rate periods 2013 (record annual outflow of 936
from a strengthening USD, equity- are generally supportive of gold tonnes). But as markets digested
market outperformance, vaccination upside risk (as low rates lower the the Fed tapering announcement
rollout (which has supported the opportunity risk of holding gold), and do not expect aggressive hikes
economic recovery), and portfolio this has not been the case in 2021. in response to higher inflation,
reallocation towards commodities Historically, rising inflation and short-term investors have started
linked to decarbonisation, high unemployment (the so-called to increase their gold exposure
renewables and electric vehicles. ‘Misery Index’) have not always led from low levels. Another noteworthy
We believe many of these to gold price gains. The correlation shift has been gold tracking real
headwinds have been priced in between gold and the Misery rates more closely than the USD.
and expect most of these hurdles Index has averaged c.6% since USD strength has capped upward
to gold to ease in 2022. In the near the ‘closing of the gold window’ momentum for gold, but real yields
term, prices are gaining upside in 1971, but the relationship suggest further upside risk.
momentum from inflation and strengthens during periods of high
employment data releases, and the economic distress. In another positive sign for gold,
downside appears well supported tactical investors are not only
given the demand response from Gold prices rose 25% during started to re-establish their gold
the physical market. Central banks the global financial crisis and exposure, but did so during a
have remained net buyers of gold. almost quadrupled from 1973-86. period of strong seasonal demand.
Prices firmed during six of the 10 Pent-up demand in India, along
We think the macro backdrop periods when the Misery Index with festival- and wedding-related
remains conducive to further gold was elevated; the relationship is buying, has provided a solid floor
price gains, given our view that the more consistent during periods for gold prices to build from. The
USD will weaken and real yields of rising inflation (defined as CPI key risk to watch is ongoing ETP
will stay negative. However, higher above 2% y/y) and low GDP growth outflows. In our view, ETP holdings
inflation has given rise to stagflation (below 2% y/y). Gold prices were would only need to stabilise in
concerns, and the market is either unchanged or rose during order for gold to retest USD 1,900/
focused on the Fed’s tapering five of the six periods when these oz and then USD 1,950/oz, the
timetable and potential rate hikes conditions were met. Although 2021 intra-year high.
thereafter. Concerns around Fed we expect US inflation to average
tapering and hikes are overdone, 3.5% next year, we do not see Platinum group metal (PGM) prices
in our view. Until the November US GDP growth falling below 2% came under extreme pressure
FOMC meeting, gold investors had (we forecast a 3.7% average). in Q3-2021, with palladium and
rhodium falling by over 20% in
September from record highs
earlier in the year. Tactical
positioning in palladium swung to
a record net short, and platinum
net-short positioning tested levels
last seen in June 2019. Along with
the return of supply, semiconductor
chip shortages have had a
severe impact on PGM demand.
While reports that the global
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