A review of 2021: defined by light and shadow

Although US stock exchange trading will continue until New Year’s Eve on Friday, we are taking the liberty of looking back at the ending year two days earlier (today’s Wednesday).

In US dollars, gold prices saw strong movement throughout the year, but particularly in the first half. In the second half of the year, despite some ups and downs, gold prices ultimately mostly hovered near the 1,800 US$ per ounce mark. The year’s highs and lows had thus already been reached in the first quarter, with around 1,960 US$ per ounce on 6 January and 1,677 on 8 March. Prices for the precious metal only briefly peeked above 1,900 and below 1,700 US$ per ounce over the moths that followed.

Since the beginning of the year, gold prices have thus dropped by almost five per cent, despite inflation rates reaching multi-decade highs across a number of major economies. The reasons are manifold.

Influencing factor: interest rate development

Generally speaking, stock market trading is future-oriented. In 2020, the markets had already anticipated the strong rise in inflation. The current year, however, saw market participants factoring in the expected end of many central banks’ extremely expansive monetary policy. The first key interest rate increases have already taken place in Great Britain, Norway, New Zealand and many emerging countries. The US Federal Reserve recently projected three upward interest rate steps for 2022. Due to interest rate expectations, market interest rates for bonds also rose compared to the beginning of this year, which in turn kept gold prices in check.

As the first interest rate hikes in the US were reflected in the market, the US dollar also appreciated significantly compared to its external value at the beginning of the year. Gold prices rose in many other currencies (including the euro, see below).

Investors focus on stock markets in early 2021

Over the year, investors’ risk appetite grew as Covid-19 vaccination campaigns progressed. In the six months following 9 November 2020, with the first reports of an effective vaccine, global equity funds saw larger inflows than within the previous 12 years. In the US in particular, major investors shifted large sums from gold ETFs, purchased for hedging purposes, into the stock markets. After all, the S&P500 gained more than 25 per cent since the beginning of the year. Still, gold remained in steady demand when temporary risk aversion was the order of the day – for example following the first reports about the Omicron variant.

Annual high for Xetra-Gold in November

Euro gold prices developed somewhat more favourably. Compared to the opening price in January, the precious metal gained roughly two per cent against the euro. Xetra-Gold hit its low for the year in early March at 45.35 € per gram, and its annual high as recently as 19 November at almost 53.20 € per gram, with the weakness of the euro against the US dollar evident.

What’s ahead in 2022?

Many analysts expect weaker gold prices below or around 1,700 US$ per ounce due to the presumed key interest rate increases. I, however, believe these increases are already factored in on the markets. Moreover, according to official statements, central banks like the ECB still regard inflation as “temporary” and have thus far not reacted. The majority of forecasters predict lower inflation rates for 2022 than for the ending year, and the likelihood is high. Supply chain problems (for example in the chip industry) are unlikely to dissolve into thin air any time soon, which could result in further supply shortages across various sectors and in turn keep inflation rates at unusually high levels. Due to uncertainties surrounding the US midterm elections at the beginning of November and regarding the pandemic, gold could remain in demand as a safe haven and will not necessarily depreciate in the coming year. In particular if the majority of market participants expect prices to fall, they will already be positioned accordingly, which could support gold prices in the medium term. All in all, as forecasts concern the future, they are difficult...

With this in mind, I wish all readers a good start to the New Year.