| | | Something about gold, that which did not act well last night
In 2021, gold was hurt by a strong US and weak EMs. Last year, we had expected gold to reach $2000/toz driven by a strong rebound in gold consumer buying, a weaker US dollar, and stable gold ETF investment. Yet a combination of strong DM growth, underperforming EMs and a belief that inflation was transient kept gold in a fundamental soft spot, facing a fall in demand for defensive assets. Gold fell by 7% in 2021, underperforming our forecast and finishing the year at $1800/toz.
Get long gold on weaker US growth and resilient EMs. Today, the global growth-inflation mix is markedly different. While there is not yet talk of recession, our economists forecast a material deceleration in US growth, and a rebound in EM activity ex-China. In our view, this combination of slower growth and higher inflation should generate investment demand for gold, which we consider to be a defensive inflation hedge. In addition, we expect continued growth in EM dollar-wealth and a rebound in consumer and central bank demand for gold. As such, we are raising our 12 month gold target to $2150/toz from $2000/toz and are launching a long Gold (Comex Dec 22) trading recommendation.
Gold rallies during rate hikes. Contrary to many investors’ expectations, Gold has remained very resilient during the recent increase in US real rates. In our view, this is due to gold’s status as both an inflation-hedging and a defensive asset. Indeed, Bitcoin fell 45% alongside high growth, loss-making equities during the latest risk-off rotation. Such a divergence between gold and real rates is common when higher rates might become a risk to real economic activity, raising the probability of recession and demand for defensive assets. Historically, gold tends to increase during rate hiking cycles, particularly when US growth starts to decelerate and EM dollar purchasing power holds firm.
Gold is a hedge against bad inflation. In 2021, gold was a poor hedge against high inflation, precisely because it was perceived to be transient. This was also true in the early 1970s - gold’s performance then was muted while inflation expectations were anchored, only rallying after central bankers’ credibility was lost and expectations began to rise in the second half of the decade.
Gold is the geopolitical hedge of last resort. Finally, gold acts as an effective geopolitical risk hedge, but only as long as the event is severe enough to impact the US economy, such as 9/11 or the 2003 Gulf War.
etc etc but I just focused on the bits I highlighted in green.
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