Page 9 - Bullion World Issue 9 January 2022

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.

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

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