Inflation, market pullbacks may sustain demand for gold as a hedge in 2022: WGC


NEW DELHI: Rate hikes by central banks can create headwinds for gold, but history shows their effect may be limited. Elevated inflation and market pullbacks, meanwhile, will likely sustain demand for gold as a hedge, World Gold Council (WGC) said in its outlook for 2022.

As per the market development organisation for the gold industry, jewellery and central bank gold demand may provide additional longer-term support, while the yellow metal may receive positive, if modest, support in 2022 from key jewellery markets such as India.

Gold had finished 2021 approximately 4% lower, closing at $1,806 per ounce. Prices rallied into year-end on the heels of the rapid spread of the Omicron variant of coronavirus, likely prompting flight-to-quality flows, but it was not enough to offset the weakness witnessed in first half.

Juan Carlos Artigas, global head of research, World Gold Council, said, “The 2022 outlook for gold comes down to which dynamics will tip the scales. While factors like persistent inflation and jewellery demand are likely to be supportive, rising rates may create headwinds. Ultimately, even if gold’s price may fluctuate, its value as a highly liquid hedge remains consistent. This is an important attribute amidst ongoing covid-related market volatility and an intensifying investor risk appetite.”

As we enter 2022, the US Federal Reserve is signalling a more hawkish stance.

According to WGC, gold has historically underperformed in the months leading up to a Fed tightening cycle, only to significantly outperform in the months following the first rate hike.

Meanwhile, data shows that gold has also historically performed well amid high inflation, and in the years when inflation was higher than 3% (US), gold’s price increased 14% on average.

WGC also opined that market pullbacks are likely to continue in the face of the seemingly endless stream of new variants, as well as simmering geopolitical tensions and overall buoyant equity valuations fuelled by a long-lasting ultra-low-rate environment.

In this context, WGC believes that gold can be a valuable risk management tool in an investor’s arsenal. Gold has a proven historical record of mitigating the negative impact of equity market pullbacks in periods of systemic risk.

“Against this backdrop, gold’s performance during 2022 will ultimately be determined by which factors tip the scale. Yet, gold’s relevance as a risk hedge will be particularly relevant for investors this year,” WGC wrote.

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