MCX Gold falls 5%, silver 9% this year; investors may not see stellar returns in 2022 on high interest rates

We are yet to be bullish in Silver despite demand expected to be stronger due to the green revolution.

Gold, silver, mcx, Multi commodity exchange
Over the last four Fed rate-hike cycles, Gold has averaged a 28% rebound, and Silver has averaged a 42% rebound. Image: Reuters

By Bhavik Patel

Most precious metal investors will be happy to put 2021 in their rear view mirrors and look for a promising 2022 year. Despite a positive price environment of historically negative real interest rates, the gold market has suffered from lackluster demand as investors focused on the Federal Reserve tightening interest rates, which started with a reduction in its monthly bond purchases in November. In dollar terms, COMEX gold gave (-1.52%) return in 2021 while in MCX, the returns were more disappointing at (-4.76%). Silver remained an underperformer in all commodities as it gave a negative return of (-12.73%) in US dollar terms while in MCX, the returns were (-8.96%). The most significant impact for gold in 2022 remains rising inflation pressures and Federal Reserve interest rates hikes. 

Interest rates and real bond yields will also be critical factors driving precious metals prices next year. There are growing expectations that the Federal Reserve will speed up its tapering process and raise interest rates before the second half of next year. Currently, markets are pricing in a rate hike in June and see the potential for three rate hikes next year. This would certainly be negative for gold but no matter how many times the Federal Reserve raises interest rates next year, they are not likely to get in front of the inflation curve. If the Fed tried to get in front of the curve, it would create a new recession. So next year we could see a sharply inverted yield curve where short-term rates rise faster than the long trend and that means real rates will remain low and that is a good environment for gold. 

Over the last four Fed rate-hike cycles, Gold has averaged a 28% rebound, and Silver has averaged a 42% rebound. Moreover, these rebounds have reached or come very close to 2-year highs more often than not. So, we believe prices of precious metals will rise once the Fed starts increasing rates. Silver had no life of its own this year except when Reddit investors drove prices above $30 briefly in March but after that fluctuated merely in gold’s slipstream. On balance, it suffered disproportionately high losses as compared with gold. 

We are yet to be bullish in Silver despite demand expected to be stronger due to the green revolution. We believe silver may have a chance to outperform in the second half of 2022 once gold starts its momentum. For Gold, we are expecting a range of $1700 to $1900 and for silver the range is expected to be $18 to $28. Investors may not see stellar returns again this year due to the rising interest rate environment but we have seen historically that gold and silver tends to perform when the US Fed starts increasing the rates.

(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)

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