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First-rate hike, high inflation favors gold - WGC

Kitco News

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) - Gold investors should expect to see a more nuanced market as the Federal Reserve looks to tighten its monetary policy through 2022, according to the latest research from the World Gold Council.

In a report published Thursday, the WGC said that although the precious metal faces some difficult headwinds this year, it still has some solid support. The comments come as gold prices fell nearly 4% in 2021, disappointing many investors.

The analysts noted that despite record-low real interest rates, the gold market struggled as investors focused on the impending pivot in the Federal Reserve's monetary policy. However, WGC said that gold's potential grows as the U.S. central bank's first-rate hike looms closer.

"Gold has historically underperformed in the months leading up to a Fed tightening cycle, only to significantly outperform in the months following the first rate hike," the analysts said. "U.S. equities had their strongest performance ahead of a tightening cycle but delivered softer returns thereafter."

Currently, markets are looking for the Federal Reserve to raise interest rates four times this year. There are growing expectations that the central bank could reduce its balance sheet later this year.

More than six tonnes of gold liquidated from global ETF in December, ETF holdings down 173 tonnes in 2021 - WGC

Although gold will remain sensitive to rate hikes, the WGC noted that investors need to focus on the bigger picture as rising inflation will keep real interest rates in low to negative territory.

"We believe there are multiple reasons why inflation will remain high, partly stemming from the unprecedented monetary and fiscal policies put in place to alleviate the effects of the COVID-19 pandemic," the analysts said. "In years when inflation was higher than 3%, gold's price increased 14% on average. Further, in the long run, gold has outpaced U.S. inflation and moved closer in pace to money supply, which has significantly increased in recent years."

Looking beyond monetary policy and inflation, the WGC said that a recovery in physical jewelry demand and renewed purchases by central banks will also continue to support prices through 2022.

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