Gold to shine as investor apathy to risk falls in 2022 - Sprott's Grosskopf
(Kitco News) - Overconfidence and apathy towards risk dominated investor sentiment in 2021, but, according to one precious metal fund manager, that could all change in the new year as the Federal Reserve looks to tighten its monetary policy, reducing the liquidity sloshing through financial markets.
Despite gold's struggle in 2021, Peter Grosskopf, CEO of Sprott Inc., said that the precious metal still remains an attractive hedge to protect against growing risks in equity markets. While Grosskopf isn't expecting equities to fall into a bear market, he said that the unprecedented run in the last two years appears to be slowing.
He added that slowing equities could also drag down economic growth, forcing the Federal Reserve to be less aggressive with its monetary policy this year.
"The stock market's going to have a more difficult year than people expect," he said.
Grosskopf's outlook comes as the S&P 500 has dropped more than 4% since the start of the year.
Grosskopf said that a significant risk for 2022 is investors are underestimating how the Fed's monetary policy will impact market conditions. The Federal Reserve will end its monthly bond purchase in March. At the same time, markets are pricing in four rate hikes this year, with lift-off starting in March. However, expectations are growing for the Fed to raise rates by 50 basis points in March and reduce its balance sheet before the end of the year.
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Grosskopf noted that markets did not react well the last time the Fed started reducing its balance sheet.
"The Fed is now talking about doing three things in rapid succession," said Grosskopf." They're talking about rate hikes and they're talking about commencing a balance sheet runoff, but they're only halfway through the first step. The odds are very low that they're going to pull that off without some sort of market correction. The odds are quite high that we're going to have all the right conditions for gold. And let's not forget inflation is still running very hot."
Looking at inflation, Grosskopf said he expects real rates to remain low, even if they continue to move up from last year's historic negative levels. Last month the U.S. Consumer Price Index showed an annual rise of 7%; inflation is running at its hottest level in 40 years.
Grosskopf said that inflation won't start to fall until at least the second of the year.
"But it doesn't matter when inflation pressures start to fade. It is still doing a lot of damage to your purchasing power," he said. "That is going to slow down growth and could force the Fed to adjust its plans."
As for Sprott's expectation for gold in 2022, Grosskopf said that prices could push back to record highs by the end of the year. He noted that gold prices are only about 11% down from the August 2020 highs.
"I think a move like that is achievable if there is a broader market correction. I think we see a slow-moving rally until people get worried and then we will see an explosive jump," he said.