Gold and the US dollar are known for their inverse correlations. So, will 2022 be the year of gold or the US dollar? Tim Hayes, chief global investment strategist at Ned Davis Research (NDR), weighs in. Tim Hayes’ gold forecasts and market assessments cryptocoin.com We have prepared for our readers.
Strategist’s dollar and gold forecasts outweigh gold
The US dollar index (DXY) is doing pretty well at 96 and continues to weigh on gold, with the Federal Reserve predicting a more aggressive tapering program and potentially two rate hikes next year. But will the inflation narrative change the outlook for gold next year? In an interview, Tim Hayes makes the following assessment about the dollar and gold forecasts:
The dollar rallied immediately after the Covid-19 crisis in March. To the question of which one is more likely to make a new high (gold or dollar), I would say gold. I’m neutral right now. Dollar, which means it stays in trading range. But I’m bull under.
Tim Hayes notes that unlike the US dollar, gold is firmly set up next year and could hit all-time highs after consolidating from record highs in August 2020:
As long as this environment continues, gold is likely to reach new record levels. And that means it’s as good as it gets for the US dollar.
According to Tim Hayes, sentiment analysis points to gold’s enhanced performance potential
On top of that, according to the strategist, the US dollar will face more persistent competition with the euro in 2022, and the European Central Bank (ECB) will likely remain in tune as the eurozone economy recovers after the latest Covid-19 variant. Tim Hayes comments:
The euro has the most weight in the dollar index and Europe is in a better position. The euro may start to rise against the dollar.
The strategist notes that sentiment analysis of the dollar and gold points to the potential for improved performance of gold, and says, “When you look at extreme emotions and you usually get over-optimistic on gold and extreme pessimism on the dollar,” the strategist says. Tim Hayes explains it this way:
This indicates when you are more likely to get a correction below and a rally to the dollar. But lately it’s been the other way around. We had relatively high pessimism on gold and optimism on the dollar. This indicates that the trade is a little long in the tooth and is ready for correction.
“This indicates an uptrend”
NDR’s chief global investment strategist says he wouldn’t be surprised to see the dollar in a downtrend as the rest of the world rebounds relative to the US and the Fed becomes more stable in its tapering approach. According to Tim Hayes, the overall trend of gold will work in their favor next year as investors witness higher declines over the long term:
It is making higher lows under the trend. And if inflation really does start to emerge more globally and become more sticky, that could really support a longer-term rise in gold. Gold has been consolidating since hitting new record highs in August 2020. And if you look at the lows seen since 2018, there have been higher lows. This indicates an uptrend.
According to Tim Hayes, gold will benefit from negative real rates that do not disappear even as the Fed cuts and increases interest rates twice next year:
This remains a real source of support. Moderate interest rate hikes will not be enough to turn real interest rates positive. We are pricing in two rate hikes next year. We also need to consider short- and long-term real interest rates. I have indicators that look at the rate of change in real rates, which are getting more negative.
What are the strategist’s gold predictions for the next year?
The investment strategist states that the strengthening US dollar in the face of interest rate hikes is one of the hurdles holding gold this year. According to Tim Hayes, inflation is temporary but will stay longer due to shortages. For the gold forecasts for the next year, the strategist makes the following assessment:
The main drivers of gold in the coming year will be negative real interest rates, inflation expectations, gold’s uptrend and weak dollar.
Tim Hayes says one of the things to watch out for as the Fed begins raising interest rates will be increased volatility in the US stock space, and investors are already starting to see that. According to the strategist, the biggest correction the market has had this year was 5% and we may be at risk of a bigger correction next year. Tim Hayes concludes his review with these recommendations:
Volatility is something we haven’t seen in a while. But it doesn’t have to be a bad year. I say keep stocks on bonds. Maybe hold a little more cash in a rising interest rate environment. Gold will continue to be good.
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