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This is the difference between gold price surging above $2k or plunging below $1,600 in 2022

Kitco News

(Kitco News) There are many opposing forecasts out there when it comes to gold price action in 2022. But what's the main difference between gold climbing back above $2,000 or dropping below $1,600 an ounce?

RBC Capital Markets has outlined two outlooks for gold — the high and the low scenarios. The high one sees gold trading above $2,024 an ounce on average in 2022. And the low one estimates for gold to trade at $1,576 an ounce.

The difference between those two outlooks is COVID-19 developments and equity market performance.

"The high scenario would be one where inflation has taken hold and the economy under-performs expectations. And so it looks like a much more risk-off outlook," RBC Capital Markets vice president of Global Commodity Strategy Chris Louney told Kitco News.

RBC's own base case outlook is much closer to the low scenario because of its take on the U.S. economy and aggressive Fed rate hike expectations.

The bank's base case sees gold averaging the year at $1,695, with the highest quarterly price in Q1 at $1,749 and the lowest quarterly price in Q4 at $1,633.

"Our low scenario versus our base case is much closer because we think that the environment can only become so much more risk-off considering the last two years we've had. The economy has grown pretty well and the unemployment is improving," Louney said.

For gold to change its bearish trajectory, two major game-changer elements need to show up, according to Louney.

"If COVID were to get worse again or equity markets were to underperform expectations, maybe you can see a swing in investors' interest towards assets like gold," Louney said. "We do assume stronger equity markets over the course of 2022. If that were not to come to fruition, you could see inflows into gold. That's when our high scenario could come into play. But that's not our base case."

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With the Fed looking to begin rate hikes as early as March and projecting at least three rate hikes this year, gold has been trading under pressure, down 1.6% since the start of the year.

"We see three rate hikes in 2022. Inflation is going to be high. The door is open for March. There's certainly inflation to justify it. Powell has described the U.S. economy as much stronger now and closer to full employment," Louney said. "That's fitting with three rate hike view for 2022."

One of the biggest obstacles to the gold price in 2021 was a lack of investor interest. And before gold can go significantly higher, that will have to change, Louney added.

"If that investor interest needle were to move, because of either deteriorating economic environment, COVID or deteriorating equity market performance, that would shift the risk skew for gold to the upside," he said. "In 2021, the main thing was the lack of investor interest. And that's despite us being in one of the most inflationary environments in recent memory. If you told someone three years ago that we'd have 5% inflation and gold wouldn't be doing that much, they wouldn't have believed you."

Gold ended up closing the year down 3.6%, its worst performance since 2015.

Activity in the gold-backed exchange-traded products was the best and the most relevant example. 

"They are down pretty significantly. And again, we're talking about an environment where everyone is talking about inflation. The fact that we haven't seen inflows into gold-backed ETFs is indicative of a lack of interest among investors," Louney said.

People have been putting their money to work elsewhere, with gold not being viewed as "cheap" either. "Gold consumers and retail investors are more price-responsive when it comes to buying. And it's not that gold got incredibly cheap over the course of 2021 by any means," Louney noted.

There is a strong chance that gold will see very similar price action in 2022 as it did in 2021, Louney pointed out.

"None of the forces that have been at play over the course of the year are going anywhere in the near term. So, 2022 in a lot of respects will look like 2021," he said. "I don't think that there's enough undercurrent from inflation to really change the tide. I struggled to see what's going to change materially in 2022 on the inflation front, as far as gold is concerned. I'm not sure how that reaction function changes materially in the span of a few months unless there's a really large change to the macro outlook."

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