Page 17 - Bullion World Issue 9 January 2022

Bullion World | Issue 09 | January 2022

stimulus, and restricted supply, link tends to be positive, it is not the probability of three interest rate
caused by supply chain frictions in consistently so and very often not hikes before end-2022. Similarly,
a world still affected by COVID-19, statistically significant. In Metals the Fed’s dot plot shows that the
has been pushing prices higher. Focus’ view, inflation feeds into FOMC is likely to rise rates three
gold mainly through real rates times next year. Importantly, with
Assuming the world continues to and yields, with which it has a the threat of the pandemic still
progress towards normality, many far stronger and more consistent looming, the US economy is still
of these factors will dissipate. link. In our opinion, this is why reliant on monetary stimulus and
Markets seem to agree with this the recent rise in inflation has not there is a risk that sooner than
thesis, as does Metals Focus. One, translated in stronger investor expected rate hikes could derail
two and five-year US break-evens, inflows. economic momentum, particularly
a measure of inflation expectations, when supply side driven inflationary
are all considerably lower than The consensus increasingly sees pressures and rising energy costs
current inflation. However, these faster than previously expected have already affected consumer
have been rising and stand at multi- policy rate increases, which will sentiment.
year highs. Meanwhile, although neutralise the impact of higher
salaries have been lagging, they too inflation on real rates. This is also In our view, this suggests that
are starting to rise, in part due to reflected in US treasuries. Having changes in policy rates may not be
labour shortages across a number said all this, real rates/yields remain as near as consensus expectations
of sectors. The risk of a feedback deep in negative territory. This are currently pricing in. Any sign of
loop, resulting in higher inflation for continues to make for a supportive change in this could spark buying,
longer is real. environment for gold, particularly especially given that speculative
when combined with exceptionally longs are also relatively thin in gold
Considering its traditional high equity valuations. We therefore at the moment. In addition, many
perception of being an inflation expect healthy inflows into the tail risks exist and gold inflows
hedge, the case for investing in metal over the next few months, could readily materialise, should
gold would thus seem compelling. but caution that later in 2022, these threats loom closer. That said,
Yet, the gold price has struggled when a US policy rate high looks price gains into early 2022 should
and flows into ETPs, futures increasingly likely, the tides will be modest; without a more dramatic
etc have been disappointing in probably turn for gold. bullish event or macroeconomic
recent months. Gold’s relationship shift actually occurring, it is difficult
with inflation, however, is not While we acknowledge that to see sufficiently widespread
straightforward or consistent over headwinds to gold investment allocations to gold by institutional
time. For example, a historical have risen and could grow further investors to drive a stronger rally.
review of rolling correlations of gold later on, some of last year’s price Selling into price strength by longs
against US inflation and inflation correction seems overdone. As we waiting for an opportunity to exit
expectations shows that while the write, Fed fund futures suggest that should also limit the upside.

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