You thought 2020 was a crappy year, but will we be back to normal in 2021? Well, we’re not exactly back to normal. After all, the epidemic isn’t over as new strains of coronavirus emerged and spread last year. In fact, in some ways, 2021 was even worse than 2020. 2021 will be remembered as the year of the return of inflation and the year of gold’s unsatisfactory response to it. So will the gold price improve its behavior in 2022? Market analyst Arkadiusz Sieroń continues with his extraordinary market comments, saying, “When the Fed starts raising the policy rate, gold may bottom out.” We also present the analyst’s comments and predictions in his original narration. cryptocoin.com We have prepared for our readers.
Why did the gold price perform poorly in 2021?
To the great surprise of mainstream economists fixated on aggregate demand, 2021 will be recorded in the diaries as the year of the big payoff of supply factors, revenge and inflation. For years, experts have talked about the death of inflation and mocked anyone who pointed to its risk. Well, he who laughs last laughs best. However, laughter with swelling tears.
Given the highest inflation rate since the Great Stagflation, the price of gold must have gone up a lot, right? Not exactly. As the chart below shows, 2021 was not the best year for yellow metal. The gold price has lost almost 5% in the last twelve months.
While I correctly predicted that gold’s performance in 2021 could be worse than last year, I expected less bearish behavior.
What exactly happened? From a macroeconomic perspective, the economy has rebounded over the past year. As the vaccine progressed, sanitary restrictions were lifted and the risk appetite that had hit safe-haven assets like gold returned to the market. Moreover, the recovery in economic activity and rising inflation prompted the Fed to reduce quantitative easing and introduce a more hawkish rhetoric that pushed gold prices down.
As always, there were both ups and downs in the gold market last year. Gold kicked off 2021 with a bang, but it began to decline sharply amid Democrats’ electoral success, the Fed’s more optimistic outlook on the economy, and rising interest rates.
The decline continued until the end of March, when gold saw $1,684. This was because inflation started accelerating at that point, and the Fed was downplaying rising price pressures and talking nonsense about “temporary inflation.”
Growing concerns about high inflation and the US central bank’s perspective to stay behind the curve helped gold reach $1,900 again in early June. However, the hawkish FOMC meeting and dot chart later that month created another strong bearish wave in the gold market that lasted until the end of September.
Renewed inflationary concerns and rising inflation expectations pushed gold to $1,865 in mid-November. However, the Fed announced that it has once again calmed the markets by reducing its asset purchases and has regained the confidence of investors in its ability to control inflation. As a result, the gold price dropped below $1,800 once again and remained there until the end of the year.
“When the Fed starts raising the policy rate, gold may bottom out”
What can we learn from gold’s performance in 2021? First of all, gold is not a perfect inflation hedge, as the chart below shows. What I mean here is, yes, gold is sensitive to rising inflation, but a hawkish Fed beats inflation in a gold market.
Therefore, inflation is positive for gold only if the Fed falls behind the curve. However, gold is cornered when investors believe inflation is temporary or will become more hawkish in response to the Fed’s upward price pressure.
Second, never underestimate the power of darkness! So, the hawk side of the Fed, or simply, don’t fight the Fed. A multi-stage asset contraction and contraction cycle turned out to be enough to scare off expectations.
Third, real interest rates remain the main driver of gold prices.
As you can see in the chart below, the price of gold fell every time bond yields rose, especially in February 2021, but also in June or November. Therefore, gold responds positively to inflation as long as inflation translates to lower real interest rates. However, if other factors come into play, such as expectations of a more hawkish Fed, and outweigh inflation, gold will suffer.
Great, 2021 sucks and we already know why. However, will 2022 be better for the gold market? While I have great sympathy for the golden bulls, I have no good news for them.
Gold’s struggle is likely to continue this year, at least in the first months of 2022, as the Fed’s walking cycle and rising bond yields will put downward pressure on gold. However, when the Fed starts raising the policy rate, gold may find the bottom and start rising again, as it did in December 2015.
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