Your Money: Use price corrections to build your gold allocation

Central bank gold purchases can be expected to continue in 2022 as they hedge themselves against macroeconomic uncertainties

But long-term gold investors will have the last laugh as a hasty taper could hurt growth and trigger market tantrums making investors seek portfolio diversifiers like gold.
But long-term gold investors will have the last laugh as a hasty taper could hurt growth and trigger market tantrums making investors seek portfolio diversifiers like gold.

As the world learns to live with Covid-19, gold prices in 2022 will be influenced by how inflation shapes up and central banks’ reaction to it. The persistence of higher inflation may boost the demand for the yellow metal, but it also increases the odds of a more hawkish Fed, hurting prices.

US consumer inflation
Moving into 2022, US consumer inflation has hit a near 40-year high and the Federal Reserve finally dropped the word “transitory” from its inflation view as it remains terribly behind the curve. This set the stage for a hawkish pivot by the US central bank. The Fed has announced doubling the pace of tapering to $30 billion a month which increased the chances of it raising rates a few months earlier than planned, which is negative for non-yielding gold.

Other central banks aren’t far behind. The Bank of England has raised its interest rate for the first time in three and half years and the European Central Bank too has announced the end of its bond-buying programme by March. The bout of inflation is likely to stay for some time and may aggravate if supply-side takes longer to normalise for any reason. A stagflationary scenario cannot be ruled out which will be incredibly bullish for gold prices.

Central banks bullish on gold
Central banks remained bullish on gold and were net buyers in 2021. In fact, the latest data from the IMF shows that it is no longer just emerging market central banks buying gold. Developed countries like Singapore and Ireland too have begun to buy gold to diversify their forex reserves. Central bank gold purchases can be expected to continue in 2022 as they hedge themselves against macroeconomic uncertainties and continue the trend of incrementally diversifying away from the dollar.

To summarise, between sticky inflation acting as a tailwind and the Fed’s tightening-induced stronger dollar taking a toll, gold because of conflicting forces is expected to stay range-bound in the first few months of the year. But long-term gold investors will have the last laugh as a hasty taper could hurt growth and trigger market tantrums making investors seek portfolio diversifiers like gold.

The monetary asset’s price should also ideally catch up with the pandemic era’s elevated global money supply and low real rates, as it has done historically. In the meantime, investors should be patient and use any price corrections as an opportunity to build their gold allocation.

The writer is senior fund manager, Alternative Investments, Quantum Mutual Fund

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