Gold to hit $1900 in H1 2022 on inflation, political risk fears

The 2022 gold outlook looks promising, with the first half of next year offering the best environment for the gold bulls, according to TD Securities' commodities outlook


Issac John

Published: Thu 9 Dec 2021, 5:24 PM

Last updated: Thu 9 Dec 2021, 5:31 PM

After almost a year in consolidation mode, gold is looking at a rally towards $1,900 an ounce during the first six months of 2022 as global markets focus on economic growth, inflation and political risks.

Precious metals analysts are upbeat about the yellow metal’s outlook in 2022 after starting 2021 off at around $1,960 and currently hovering around $1,780 an ounce.

Offsetting inflation and a stronger dollar kept gold little changed in November. Towards the end of November, gold found support at the $1,780/oz level, near its 50- and 200-day moving averages. While concerns over the new Omicron variant provided some additional safe-haven support for gold in the final few days of November, it wasn’t enough to push gold above $1,800/oz.

The 2022 gold outlook looks promising, with the first half of next year offering the best environment for the gold bulls, according to TD Securities' commodities outlook.

"Political risks associated with the pending US midterm elections, US fiscal drag, fairly steadfast central banks gold purchases, and a significantly slower pace of US and global recovery are additional factors which may see investor rekindle their interest in gold," wrote Bart Melek, TD Securities global head of commodity markets strategy. "These factors should help lift gold into $1,900/oz territory in the first half of 2022, as per our projections."

"Real interest rate trends which were driven by inflation developments, Fed policy signals, and nominal rates, led to these gold price fluctuations. For most of 2021, investor ETF, CTA, and derivatives positioning were very much skewed toward the shortening of exposure," Melek wrote.

Gold ended November slightly higher, rising two per cent month on month to $1,804.4/oz as steady interest rates and higher inflation expectations were offset by a stronger dollar. Global gold ETFs had their first month of inflows since July, and developed market central banks added gold to their reserves for the first time since 2013

Analysts said one positive gold driver that the markets are currently underestimating is a Federal Reserve that is unwilling to raise rates in the middle of next year.

"Considering this framework and the fact that the market is pricing a Fed funds hike as early as next summer, the current investor bias toward the short end of exposure has driven prices down to $1,755 recently. But summer of 2022 may be much too early for the Fed to pull the trigger on Fed Funds hikes, given the fact that nonfarm payrolls remain some 4-5 million below pre-Covid levels in the U.S.," Melek pointed out.

Next year's focus will be on the economic data, determining just how aggressive the Fed can afford to be next year.

Analysts said weak economic data over the next several months and the Federal Open Market Committee’s relaxed attitude toward strict inflation targeting (one which perceives inflation as transitory) are factors likely to keep the US central bank from pulling the trigger on a hike as early as the market is projecting.

This scenario would see real rates remain low and encourage gold buying next year, analysts said.

"The hope for the resulting higher potential growth, non-accelerating inflation rate of unemployment, may all leave the U.S. central bank comfortable keeping the economy running hot for longer. This would be a very gold-accretive real interest rate environment. The best case for gold is high but decelerating inflation," Melek said.

TD Securities outlook estimates for gold to average $1,875 in the first quarter of next year, $1,824 in the second, $1,800 in the third and $1,750 in the fourth.—

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