Gold Outlook 2022: Consolidation a Launching Pad for Price Rise

Gold outlook 2022: Tailwinds to come from structural inflation

The Investing News Network (INN) spoke with several analysts, market watchers and insiders about which trends will impact gold in the year ahead. One theme that emerged was the growing impact of inflation.

One of gold’s functions has been as a hedge against inflation in the face of a devaluing dollar. However, in 2021 gold has yet to see a significant uptick despite rampant inflation.

The discrepancy has led to concern that a stagflationary period is approaching. As the World Gold Council (WGC) states in a November report, this can be damaging to both the economy and financial markets.

“Gold hasn’t benefited from record-low real rates and high inflation in 2021," the report reads. “We believe this has to do with rosy expectations about inflation, growth and equities.”

The WGC points to slowing economic growth globally as an indicator that stagflationary conditions are mounting. It attributes much economic deceleration to fears over new variants of COVID-19 and global supply shocks.

“These shocks are also contributing to the elevated inflation prints we’ve experienced over the last few months,” the report notes. "Higher commodity prices, fewer workers, a shortage of parts, and sticky global distribution channels are among the factors pushing up inflation rates to multi-decade highs."

For Adam Perlaky, senior analyst at the WGC, gold is primed to benefit from these conditions.

“One of the key qualities of gold is its ability to protect against inflation, averaging 15 percent annual returns when the US Consumer Price Index is above 3 percent, as it is currently,” he told INN. “Continued inflation would likely bode well for the price of gold, as interest rates impact the opportunity cost of gold.”

The analyst went on to explain that it’s important to put rate levels in perspective as they are at extreme lows.

“When rates moved lower, the comparative cost of holding gold versus, say, a bond that pays a coupon, improved, which is one of the reasons for its 25 percent increase in 2020. When rates move higher it hurts the opportunity cost, one of the reasons for its weaker performance in 2021.”

A factor that will strongly influence how gold moves in the months ahead is monetary policy, which has been highly accommodative over the last 18 months.

“Even a modest move higher in rates would not suggest a significant detriment to gold’s price based on historical data,” Perlaky said. “Inflation and rate movements are going to be heavily driven by central bank commentary and action or inaction, which seems to change more regularly than one would expect.”

Part of the inaction from central banks stems from their widespread belief that inflation is transitory, making them less motivated to increase rates.

“Every time the (US) Federal Reserve has actually increased rates, gold has turned up,” Adrian Day of Adrian Day Asset Management told INN via email.

“So the Fed (or other central banks) threatening to tighten hurts gold, but when they act, it’s always too little too late,” he explained. “This time in particular, the Fed and other central banks, notably the European Central Bank, have not believed the inflation story, saying it’s just a result of temporary supply chain issues. They will lag inflation, in my view, and that will be positive for gold.”

​Gold outlook 2022: Supply and demand trends

Another contributor to gold's price movements in the new year will be supply and demand fundamentals.

Bolder investor risk appetite in 2021 led to a 9 percent decline in gold demand coming largely out of the exchange-traded fund (ETF) segment.

“A doubling of central bank buying and 50 percent growth in jewellery demand over the first three quarters only partly offset the decline in ETF demand,” the WGC's Gold Demand Trends Q3 2021 overview states. “Year-to-date demand remains notably weaker when compared with the same pre-pandemic period of 2019.”

Looking ahead, Gerardo Del Real of Digest Publishing sees demand for gold ETFs increasing.

"I think they'll shape up,” he told INN. “The momentary pause in the stock market, and just how top heavy so many different asset classes are — I think it's going to force funds and central banks and family offices and the wealth drivers of the world to really reallocate some of those profits and rotate into something that doesn't have counterparty risk, that being gold."

Del Real continued, “The ETFs themselves aren't physical gold, so there's some counterparty risk there. But all in all, it's such an easy way for big funds and big family offices to participate in a rise in the gold price that I think we're going to see a healthy inflow in 2022 of capital into the gold ETF space.”

In the meantime, weakened investor sentiment was compounded with record mine supply growth in Q3, when mine output increased 4 percent year-over-year to 960 tonnes, the largest quarterly production level on record.

“Part of the mining increase is related to the miners playing catch-up from COVID-19 last year, but there continues to be strong demand for gold in many areas of the market, like jewelry, bars and coins and technology," Perlaky said. “With gold prices at current levels with adequate demand, it would suggest supply could continue to grow.”

Adam Webb, director of mine supply at Metals Focus, echoed this forecast, noting a small quarter-over-quarter decline between Q3 and Q4 2021.

“We expect gold output to remain relatively high in Q4 2021, but drop quarter-on-quarter,” he said. “This will largely be a result of the seasonality of production in Russia, which usually declines in the winter months.”

He added, “Looking further ahead, we expect annual mined gold production to increase by 3 percent year-over-year in 2022, driven by higher output from existing mines such as Grasberg (Indonesia) and Tasiast (Mauritania), alongside the ramp-up of new projects such as Nezhda (Russia) and Tri-K (Guinea).”

While rising production may aid in stock growth for producers, inflation will add headwinds to the mining sector.

“Inflation is pushing up production costs for gold miners. Our latest data shows the average all-in sustaining cost in the gold-mining industry reached US$1,123 per ounce in Q3 2021. This is an increase of 16 percent year-over-year and the highest levels since 2013," Webb said.

“However, despite higher costs, industry margins still remain relatively high because of the strong gold price.”

As the WGC’s Perlaky explained, for producers these rising costs can often be mitigated by a rising gold price. But for explorers and developers, it may be more challenging.

“On the development and explorer side of things, increasing costs is a really bad thing,” said Brian Leni, editor of Junior Stock Review. “For instance, drilling is usually a developer’s or explorer’s largest expense. Given the inflation, that cost has only grown over the last 12 months," he noted. “Drills are harder to get due to demand and they cost more to operate — labor, gas and maintenance.”

In this environment, juniors will likely be forced “back to market" sooner than expected. “Hopefully when they go looking for the cash, it is at higher share prices, which makes the impact to the existing shareholder base much easier to bear,” Leni commented.

Gold outlook 2022: Catalysts and headwinds

Forecasting has become particularly challenging over the last 18 months with so much uncertainty and volatility arising from lockdowns and supply chain disruptions.

“I think that (supply chain issues) have already had an impact," Leni said. “For instance, a development company that I’m invested in is building a mine in Brazil. They have moved forward and ordered big, long-lead-time items, such as their ball mill, early to ensure that even if there is a delay, they can deal with it.”

Webb highlighted similar issues.

“Supply chain and transport issues are impacting gold miners by increasing the cost of transporting materials to sites, such as equipment, fuel, chemicals, spare parts and other consumables," he said. “Meanwhile, the cost of transporting finished products from mine sites has also increased for the same reasons.”

Delays in getting parts and equipment to sites and getting gold from projects is only one factor.

“A larger issue for the gold sector has been travel restrictions preventing key personnel getting onsite,” Day said.

The WGC is more optimistic in its look ahead about the potential impact of logistical and transport woes.

"The gold supply chain was impacted by COVID-19 in the short run last year, but has since rebounded strongly,” Perlaky said. “A systemic shutdown like the one we witnessed in 2020 would certainly impact global supply chains across the board, but in the current environment, we are not seeing major concerning data points.”

Gold outlook 2022: Price growth ahead

Gold may have struggled to gain traction in 2021’s market; however, the analysts INN spoke to remain positive about the yellow metal's fundamentals heading into 2022.

Metals Focus' Precious Metals Investment Focus report, released in early December, calls for a 2022 price uptick.

“The gold price is forecast to rise by a marginal 1 percent to a new record annual average of US$1,820 in 2022, even as H1 strength gives way to H2 weakness,” the report reads.

In terms of catalysts, Day says investors should watch for “the Federal Reserve backtracking on speeding up its taper or postponing higher rates and a correction in the stock market.”

However, Day also warned of potential headwinds from the US dollar. “Already the interest rate differential favors the dollar, and if the Fed raises rates while the European Central Bank and Bank of Japan do not, then the dollar simply becomes all the more attractive compared with other major currencies.”

Leni also urged investors to keep an eye on Fed policy around interest rates and its correlation to gold.

“A small adjustment upward, even 0.25 percent, could negatively impact gold. I think that this would be a short-term negative," Leni said. “Remember, you buy gold because it is real money and a hedge against the financial turmoil that is ahead of us.”