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Gold price to shed $170 as Fed hikes rates next year - ANZ

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Welcome to Kitco News' 2022 outlook series. The new year will be filled with uncertainty as the Federal Reserve looks to pivot and tighten its monetary policies. At the same time, the inflation threat continues to grow, which means real rates will remain in low to negative territory. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2022.

(Kitco News) In the middle of next year, gold will begin its decline back to $1,600 as the Federal Reserve initiates rate hikes to control inflation, said ANZ senior commodity strategist Daniel Hynes.

"The target for the end of the year is $1,600 for gold and $22 for silver," Hynes told Kitco News in an interview.

The majority of gold's selloff will happen in the second half of the year, Hynes clarified. "We're not expecting much upside from current levels. The $1,800 level is essentially our Q1 target, which is barely above current levels," he said. "And then, during the second half of the year, gold is likely to ease back and hit $1,600 by the year-end."

Additional volatility is expected, but nothing too drastic. "The volatility in the gold market has been relatively low. In part because the Fed has been quite transparent about its policy. And that's something that will continue."

Gold is unlikely to see wild swings outside of a black swan event or some major shift in policy, at least in the first half of the year. But once the rate hike cycle kicks off, more volatility will drag gold down, Hynes noted. "Next year, we have two hikes in our forecasts and both in the second half of the year," he said.

Australia and New Zealand Banking Group's (ANZ) outlook on inflation is that it will remain relatively high through the first half of the year. "We do expect to see some of that to ease back a tad as supply bottlenecks ease. But we are starting to see signs that the expected pullback in inflation will be much more subdued than many have anticipated, including the Fed," Hynes pointed out.

Gold is stuck between these two forces, prices to climb towards $1,900 in Q1 2022 – Standard Chartered

The Fed's ability to contain inflation and bring it back to 2%-3% will take time. "If inflation is still high by the end of next year, then you may start to see the Fed move to tighten that up. For the moment, they are happy to allow it to stay above trend."

The U.S. stock market will likely sell off once the Fed starts to tighten next year. "They've been on a phenomenal run for quite some time. That would be the sort of spark to create another selloff."

However, since markets already see this coming, the reaction to rate hikes should be limited. "We're not really expecting to see a huge reaction from tapering as such. For the moment, rate hikes are still a late 2022 story for the market. It'll be that gap between expectations around tapering asset purchases and rising rates. These are separate issues. Rate increases will be the more important factor to look out for when watching gold," he said.

Hynes also pointed out that the perfect conditions for a gold rally are largely behind the market, including loose monetary policy, low rates, high inflation, and massive fiscal support.

"It's hard to see what could actually spark another rally, at least in the shorter term. The Fed is going to ease back on purchases. The markets are pricing in a rate hike in the not too distant future. The outlook for the U.S. dollar is sideways," he said. "These conditions are not rally-inducing. Other than this inflation story, which continues to get steam, it's probably going to be another period of relatively stable prices."

Potential black swan events to watch out for next year are a flare-up in geopolitics and the energy crisis, Hynes stated.

"The energy transition and everything that comes with that is going to be a major one next year. It can still impact the precious metal sector itself if that does lead to substantially higher inflation," he explained. "Also, geopolitics. We've got the standoff between Russia and the West, with the Ukraine situation. And building tensions in the South China Sea. That's going to be a greater risk for 2022."

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