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Starting the new year on solid footing

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) - The new year has kicked off with a bang as U.S. consumers continue to face rising inflation pressures, with consumer prices hitting their highest level in nearly 40 years.

Inflation continues to be a double-edged sword for the gold market. Although inflation will keep real interest rates low, rising consumer prices are being met with expectations that the Federal Reserve will take aggressive steps to cool down the economy.

The Federal Reserve is looking to end its monthly bond purchases in March. Markets also expect to see the first rate hike in March.

Markets are pricing in four rate hikes this year. In one last hawkish move, the Fed has signaled that it could start reducing its over-blown balance sheet before the end of the year.

At first blush, these seem like some pretty significant obstacles for the precious metals market; however, there is still a lot of bullish sentiment in gold and silver early in the new year. Many analysts have pointed out that expectations that the Federal Reserve will be behind the inflation curve are starting to shift to fears that aggressive monetary policies will push the economy into a recession.

Once again, the Federal Reserve has painted itself into a challenging corner that should be good for gold prices through the rest of the year.

Billionaire "Bond King" Jeffrey Gundlach made headlines early in the week after he said that he is on "recession watch" in 2022. In a recent webcast, the DoubleLine CEO noted that U.S. consumer confidence and the yield curve data point to a potential economic slowdown. "We are going to be more on recession watch than we've been for the past two years," he said.

Gold bulls see potential for higher prices as inflation remains a threat

We can already see how inflation is starting to take its toll on consumer activity.

Friday, U.S. Commerce Department said that retail sales dropped 1.9% last month, surprising many economists. The biggest factor behind the dismal numbers was inflation.

Consumers are starting to see their purchasing power erode, forcing them to buy fewer items. Many analysts note that with rising commodity prices at the start of the year, current conditions could worsen before they get better.

In a recent interview, Axel Merk, president and chief investment officer at Merk Investments, told Kitco News that gold is in a very solid position as an essential portfolio diversification tool no matter what the Fed does this year.

"I am very happy where gold is right now. I think gold has found a solid base here," he said.

That is it for this week. Happy New Year and I hope everyone has a fantastic 2022.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.