The gold price in 2021 failed to live up to the lofty forecasts of analysts at the start of last year. Sanjiv Arole dissects the reasons behind the downward trajectory of the yellow metal’s price.
Gold buffs, gold bugs, analysts, experts, forecasters, chartists, et al predicted that gold would scale fresh highs in 2021. In fact, most proclaimed that gold would not only reach fresh all-time highs but, scale $2,200 per ounce, then $2,500 per ounce and even cross the $3,000 per ounce level.
However, reality was quite startling. The yellow metal ended the year at $1,805.85 per ounce on 30 December, 2021, down by over 7.6% against the 4 January, 2021 level of $1,943.20 per ounce. The $2,200 per ounce levels predicted by most analysts round the globe seemed to be a distant dream.
During 2020, buoyed by the pandemic, lower interest rates, the stock market decline, the poor state of global economy, and the stimulus on offer by Central Banks, geopolitical tensions, etc., the yellow metal smashed through the all-time high levels scaled in September 2011 of around $1,926 per ounce. Not only that, the yellow metal even scaled a fresh all-time high of $2,067 per ounce on August 6, 2020.
The LBMA holds an annual survey on gold price forecasts from pre-eminent analysts and experts from all over the world in mid-January every year. In 2021, the average gold price for 2021 was predicted at $1,973 .8 per ounce (up by 11.5% over actual average price for 2020), with a high of $2,680 per ounce and a low around $1,488 per ounce. However, most analysts predicted higher gold prices during 2021 and beyond. A few predicted around $1,900 per ounce. But, the majority predicted gold price to be seen in the range of $2,200-$2,400 per ounce. The reason for the optimism was pretty evident if one looked at a set of ingredients ready to propel the gold price into the stratosphere.
Consider the following:
(a) The USD has been sliding against all currencies, including the rupee.
(b) The stock markets were already at all-time highs in most countries, well past previous highs. The bubble was ready to burst.
(c) Inflation was expected to rise as a result of stimulus-aided recovery of economies across the world. Five-year inflation expectations were at five-year highs.
(d) The US pumped in trillions of dollars through most of 2020 and 2021. Most of the countries followed suit, including the EU.
(e) Central Bank balance sheets were expanding and fiscal deficits rose to alarming levels as countries fought to improve the state of their economies and give a boost to productivity; better income levels for its people; and fight the pandemic.
(f) Geopolitical tensions increased across the Middle East, the Gulf and other parts of the world. The Indo-China eye-to-eyeball confrontation across the Himalayas, by two nuclear powers, have been a feature since mid -2020, the meltdown in Afghanistan and other flashpoints across the world have been in place over quite some time now.
(g) Then, we had various variants of Covid-19 fuelling the first, second and third waves across the world.
No wonder the predictions were so optimistic. Yet, there was no gold rally.
In fact, instead of gold, it was palladium that scaled over $3,000 per ounce earlier in the piece. Platinum, too, bridged the gap with gold quite significantly and the gold-silver ratio, too, was in the 70 to 80 range instead of over 120 as seen in 2020.
If one were to compare the actual average gold price of $1,798.6 per ounce for 2021 with the price predicted by LBMA analysts of $1,973.8 per ounce, then the $175 per ounce variance tells its own story. The nearly 10% shortfall in the actual average price for gold is mirrored across the precious metals basket.
A look at the chart on promise v/s performance gives a clear picture. The future seemed bleak for gold. Cynics claimed that the ultimate bubble, gold, had finally burst!
But, then was that really the case? A closer look at the numbers revealed a different view altogether.
The average gold price for 2021 at $1,798.6 per ounce was, in fact, up by over 1.6% over the 2020 average price of $1,769.64 per ounce. The story was repeated in all other precious metals as well. Then, the lower gold price in rupee terms, against expectations of very high prices, saw pent up demand from before the pandemic and stocking by the trade. As a result, India imported over 1,050 tonnes of gold in 2021 at well over $55.7 billion, breaking the 2011 high of over $53 billion. This meant a robust demand for gold, though it also meant a worry on the balance of payment issue.
On the gold ETF front, there was an actual rise in demand for gold ETFs in India amounting to $595.3 million. On the global level, North American funds led net outflows of 173 tonnes or $9.1 billion in 2021. However, in spite of that the global gold ETFs holding at around 3,570 tonnes was much higher than pre-pandemic levels.
On Central Banks gold purchases, the year saw 393 tonnes on net purchases till the end of September 2021. Though October showed a 2 tonne rise, November saw a 21 tonnes outflow of gold. But, overall net gold purchases by Central Banks is expected to be much higher than the 200-odd tonnes in 2020. India, Thailand, Brazil, Poland, etc., were the leading buyers of gold through their Central Banks. The trend of Central Banks shifting from USD to gold accelerated during 2021. Gold holdings of Central Banks is currently at a 31-year high.
In summation, even though gold failed to deliver on its promise on the price front, it is in a fairly robust space. In fact, towards the end of 2021, gold seemed to be gaining some of its lost ground. Even as the stock market bubble continues to bulge, oil prices zoomed higher, tougher monetary price regime seemed on the anvil with tapering off quantitative easing by the Fed and other Central Banks, a signal to a higher interest rate regime in 2022, focus on inflation, bond yields, etc. saw gold rebound instead of retreating further down.
Gold bears were more than surprised as gold firmly held above the $1,800 per ounce levels by the end of the year. It almost went to double the platinum price and even palladium struggled to be at par with gold. The gold:silver ratio, too, slipped towards 80.
So, what’s in store for the yellow metal in 2022? Will gold reignite its romance with $2,000 per ounce and further? Or will it slip down into oblivion?
The moot question in 2022 would be whether the US Fed would be able to tame the already high inflation of nearly 7% in the US. Then, would real interest rates turn positive and if the US Fed hikes interest rates aggressively. With tapering off already under way, would the Fed be able to reduce the US balance sheet.
In the midst of this is the danger of recession looming over the horizon should attempts to rein-in inflation to the ideal 2% trigger it. There is also the longstanding threat of a major stock market reversal on the anvil.
If, in spite of all the measures inflation is not curbed, then, gold could make its move. There is a growing group of analysts and market watchers, not merely gold bugs, who believe that 2022 could be the year for gold!