Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold and silver may spring a 2022 surprise
Ole Hansen
Head of Commodity Strategy
Summary: Gold managed a small rally during the final days of 2021 thereby cutting the annual loss to around 3.6%, and while being the worst decline since 2015, it was nevertheless a respectable year for the yellow metal, not least considering the headwinds from rising interest rate expectations and the strongest dollar in six years. Once the dust settles it is very important to watch what the FOMC does and not what it says and with that in mind gold, silver and not least platinum may all spring positive surprises in 2022.
Gold managed a small rally during the final days of 2021 thereby cutting the annual loss to around 3.6%, and while being the worst decline since 2015, it was actually a respectable year for the yellow metal. Not least considering the headwinds from rising interest rate expectations and the dollar which against a wide basket of currencies rose by 5%, its best year since 2015.
Gold is often used by fund managers as a protection against the unexpected, whether it is macroeconomic or geopolitical developments. The wall of money provided by governments and central banks following the first wave of the Covid-19 outbreak helped reduce macroeconomic risks while sending the stock market sharply higher resulting in what my colleague called a mindboggling year for equities.
Responding to these developments, total holdings in exchange-traded funds backed by bullion saw a steady decline throughout the year as investors, including some of the largest real money asset managers, cut their holdings by 287 tons, the most since 2013, and thereby reversing parts of the 750 tons that were added in 2020 during the first year of the pandemic.
During the first days of trading in 2022 gold has after reaching a six-week high returned to its established comfort zone close to $1800 per ounce. This the biggest decline in six weeks was triggered by surging bond yields as investors braced themselves for monetary policy tightening in 2022.
The weakness has been driven by a sharp turnaround across some of the other metals, not least platinum, which at one point on Monday slumped more than 50 dollars, thereby seeing its discount to gold rise to a 13 month high above 870 dollars per ounce.
The first couple of weeks in a new year often fails to deliver much in terms of directional inspiration and clues as to what happens next, and until the picture becomes clearer with the regards to the direction of the dollar, the timing and pace of Fed rate hikes, gold may struggle for direction. Key to the ultimate direction hinges, as mentioned, on the direction of the dollar and not least the how high real yields can go. We believe 2022 could offer a rough ride for global stocks as interest rates rise and consumers keep more money in their pockets following a wild year of strong consumer spending.
We need to watch closely what the US FOMC does, and not what it says, as that will create the real impact. Investors getting the Fed actions, and after that the direction of the Chinese economy right in 2022 are likely to be the ones realizing the biggest profits on their investments. We do not believe US real yields can rise to the extent that others are forecasting, and with that in mind and given prospect for US stocks coming off the boil, we believe that gold as well as silver and platinum will offer a positive return in 2022, with the yellow metal once again showing its credentials as an investment that over time improve returns while reducing risk, and overall volatility in a portfolio.
A recovering gold price is likely to result in an even stronger performance in silver, and potentially also platinum. Both metals will enjoy the tailwind from increased focus on the evolving green energy transition with platinum demand, apart from a recovering automobile industry, coming from the production of hydrogen and silver from solar panels and other electrical appliances.
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