The gold market is not afraid of higher bond yields
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 practically just started and things are heating up, creating a bid for gold and silver as both precious metals broke out of their consolidation.
Before we get into the specifics of gold and silver, let's look at overall market conditions. This week oil prices rose to a seven-year high, spiking above $85 a barrel. Meanwhile, equity markets have fallen from their lofty perches, with the Nasdaq falling into correction territory.
Oil prices are already up 10% so far this year; this follows its massive 55% move last year. According to analysts, prices are being driven by falling production and growing geopolitical uncertainty. Gold investors need to watch oil prices because it is one of the most significant factors that drive inflation pressure, which is currently at its highest level in 40 years.
While the inflation threat is nothing new, according to many analysts, investors are finally taking it seriously. Which makes gold's push above $1,830 an ounce all the more incredible. Last year, gold languished in obscurity even as real rates fell to record levels. Now gold is catching a bid even as real rates rise 50 basis points. The yield on 10-year bonds rose to a roughly two-year high because of the growing inflation threat.
Investors are starting to realize that rising inflation means tighter U.S. monetary policies, which will reduce liquidity in the marketplace and drive earnings expectations down. This is causing investors to flee equity markets and shun a lot of the risk they embraced in the last two years, which is why the risky tech sector and Nasdaq are leading the downtrend.
|Gold to shine as investor apathy to risk falls in 2022 - Sprott's Grosskopf|
As difficult as this environment is for investors, it is positive for gold that can be an inflation hedge and protect against market volatility. These conditions will only worsen as inflation pressures have not yet peaked and the Fed has to step in to deal with the looming threat. However, in another positive for gold, many analysts don't expect that the Fed will be able to meet current market expectations.
The Federal Reserve is looking to end its monthly bond purchase by March. There are growing expectations that not only will the U.S. central bank start its new tightening cycle in March but that it will raise interest rates by 50 basis points. In total, markets are pricing in four rate hikes. Finally, to cap off monetary policy, there are expectations that the Federal Reserve will start to reduce its balance sheet before the end of the year.
Analysts have noted that the risk of a policy mistake has risen sharply as it is unlikely the U.S. central bank will achieve all of these goals.
"The odds are very low that they're going to pull that off without some sort of market correction," said Peter Grosskopf, CEO of Sprott Inc., in a recent interview with Kitco News. "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."