Is gold still attractive?

While rate hikes can create headwinds for gold, history shows the impact may be limited. In fact, the past two gold bull cycles began with the Fed raising interest rates (2004, 2015).

Key takeaways:

  • The US dollar faces headwinds, which has historically benefited gold
  • The recovery in global growth tends to increase physical demand for gold
  • Speculative positioning indicates bullish sentiment
  • ESG hurdles will likely affect gold supply
  • Short-term technical analysis shows a “wait-and-see” pattern: stay tuned for the next move!

Dollar & real assets

Early 2022 moves suggest a positive outlook for gold, especially if recent dollar strength eases. The disinflationary environment of the past decade favored US tech and allowed the US to attract capital from around the world, in turn leading to a stronger dollar. Current challenges, related to the long-term effects of the pandemic and global warming are pointing to a more inflationary environment compared to the previous decade. This could favor real assets and commodities such as gold.

The US is one of the most indebted countries in the world and has been recording twin deficit for decades. Additionally, US money supply (M2) has risen, which, historically, has seen a currency depreciate. The amount of money in the system in the US has increased from USD5 trillion in 2001 to USD21.4 trillion in 2021, with quarter of that being printed just over the past two years.

Moreover, the IMF’s October regional economic outlook expects global growth to remain above trend in 2022, with global output expected at 4.9%. In general, the US dollar tends to underperform when global growth is strong, as a risk-on environment sees capital flow to more commodity-rich countries where the return on capital is higher.

usd gold

Source: FlowBank / Bloomberg


Inflation is at a four-decade high in the US, which has led markets to anticipate Federal Reserve an interest rate hike as early as March. Still, with real yields still below zero, the opportunity cost of holding gold is non-existent. A more hawkish Fed could also lead investors into assets that act as inflation-hedges (real assets), such as gold.

While rate hikes can create headwinds for gold, history shows the impact may be limited. In fact, the past two gold bull cycles began with the Fed raising interest rates (2004, 2015).

fff gold

Source: FlowBank /Bloomberg

Recovery in global growth

Physical demand for gold largely comes from four sectors (see below). Gold has industrial properties, though that demand is small and stable, having little effect on gold prices. The larger demand comes from jewellery and central banks, that is sensitive to economic cycles.



Source: www.gold.org

The strength of the currency of cyclical economies (like emerging economies) tends to fluctuate with the strength of its economy. Many choose to invest in real assets like gold, as it is perceived as a store of value, that can help offset the loss in purchasing power during potential future downturns. These investments usually occur when the economy is growing, as the disposable income is higher. Interestingly, the correlation between emerging markets and gold is the highest compared to other major equity indices. When emerging economies do well, gold tends to rise, as demand increases.



Source: FlowBank /Bloomberg

But the same analysis remains true for economies with high current account deficit (like the US), that tend to see inflation erode the purchasing power of consumers. For example, USD1 in 1933 had the same purchasing power as USD26 today, that is close to 96% of value erosion over 90 years, according to data extracted from the Bureau of Labor Statistics.

Speculative positioning

The CFTC’s weekly Commitment of Traders report provides a breakdown of the net speculative positions held by traders. As illustrated below, sentiment appears to recently have improved compared to the beginning of 2021. Speculative positions are higher than usual, indicating the market’s positive stance on gold.


Gold faces ESG hurdles

The growth in ESG requirements will likely make mining activities very costly, at least for now. Further technical advances for the industry are still years away. While many companies list the goals in their sustainability reporting, much of the effort is "purely cosmetic”, according to a joint report from the Responsible Mining Foundation and the Columbia Center on Sustainable Investment at Columbia University (2020). Therefore, tighter supply is likely to remain supportive for the price of the yellow metal.

Price action

After a great run from early 2019 to mid-2020 that led to 60% appreciation, gold has entered into a consolidation zone, which should be expected. At the moment, the price is forming a triangle, a typical representation of a situation where participants are waiting for news – most likely a move in real yields – to see the next direction. When the price reaches the crossing point of the support and resistance line, it usually breaks out either to the upside or downside. Encouragingly for a potential upside move, so far, gold investors continue to “buy the dip”. Indeed, the weekly closing price never crossed below the 100-day moving average.



Looking ahead

Inflation expectations and Fed’s ability to control inflation will play an important role in gold’s future price. While many expect inflation to spiral, we believe inflation will cool off throughout the year. However, given the level of asset prices and the amount of debt in the system, raising intertest rates even modestly will likely create volatility in markets and accordingly increase interest for safe haven assets such as gold.

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