Gold price has 'innate ability to rally when consensus is bearish' – MKS
(Kitco News) Gold's top three drivers in 2022 are inflation, the Federal Reserve, and stock market volatility, according to MKS PAMP GROUP outlook for the year.
"We do not hold the view of most analysts (a downward trajectory of gold from here)," said MKS PAMP GROUP head of metals strategy Nicky Shiels. "Gold is a referee on the Fed and a policy mistake (either rampant inflation or an aggressive hiking cycle bringing forward recession risk), who are currently well behind the inflation curve."
Even though gold is slightly down on the year so far, prices have the ability to move higher from here, Shiels wrote.
"Gold has one more push higher as the 'inflation' or 'Fed policy mistake' peak is not yet in. A short U.S. labor market, future COVID variants and associated zero/low COVID policies create necessary persistent stagflationary forces," she said.
There are downside risks to the economy once the Fed starts raising rates and reducing its balance sheet this year.
"We have an average price forecast of $1,800/oz with upside risks, as disengaged investor subscription could reengage on equity market volatility and structural bullish drivers (unsustainable U.S. and global debt path, asset bubbles, messy geopolitics, currency devaluation concerns, and impending sovereign crises), which usually reemerge on a Fed hiking cycle," Shiels noted.
Despite gold's disappointing performance in 2021, it is not in a bear market yet. The precious metal has "an innate ability to rally when consensus is bearish," the head of metals strategy added.
"Given the current U.S. debt overhang, interest rates are unlikely to rise fast enough to drive very high real positive rates; negative or low real rates to persist throughout the Biden administration, creating a supportive backdrop for Precious Metals," Shiels outlined.
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There are two alternative scenarios for gold in 2022 — a surge to $2,000 an ounce and a drop to $1,400 an ounce, Shiels pointed out. "The bullish and bearish cases for gold cannot be more distant as it hinges on a very unpredictable Fed hiking cycle," she said.
The $2,000 an ounce gold scenario involves the Fed failing to control inflation, increased physical demand, stock market volatility and new geopolitical risks.
Shiels described the macro environment in the bullish scenario as: "Supply chain bottlenecks or higher energy prices drive sustained inflation risks, triggering renewed investment inflows. A Fed policy mistake leads to acceleration of stagflation narrative and a weaker U.S. dollar … New geopolitical risks given inward-looking U.S. foreign policy."
Shiels has given this $2,000 case 30% probability.
The bearish outlook depends on cooler inflation, more robust U.S. growth and weaker physical demand.
"We acknowledge that if $1,675/oz is broken, all hope of pricing in inflation is gone and a new bear market is enacted, where it'll lose appeal as a monetary asset and inflation hedge," Sheils noted.
Shiels' bearish outlook: "Fed taper & hiking cycle is aggressive, contains inflation into midcycle, and drives both real and nominal rates much higher, much faster. Sustained reflation risk – improved global growth data & higher inflation leads to a faster Fed hiking cycle (higher interest rates & U.S. dollar, inducing large-scale positioning deleveraging in gold). Central Banks turn net sellers. Asian physical demand disappoints."
The bearish outlook is given 20% probability in the outlook.
Silver is seen averaging $22 an ounce in 2022, with a low-high range of $25 an ounce. "Silver is relatively more sensitive to U.S.$ upside and thus with a more hawkish Fed priced in for 2022, its downside is accentuated vs gold's downside. That is notwithstanding the fact that fundamentally it remains saturated, which is highlighted more so in rising interest rate environments," Shiels noted. "Decent retail demand, rising industrial demand on continued growth expectations and its growing role in the energy transition are bright spots."