For a long time now, I have felt that the US equity market along with many other investments were being driven upwards by cheap money from the world’s central banks rather than by their underlying fundamentals. And that this madness induced by policy makers could not go on forever and had to end at some point. I have also had a nagging feeling that the inflation we experienced last year was not going to be a “flash in a pan” moment and instead, the starting signal for the end of the easy money that the world had enjoyed since 2008.
As countries begin to navigate out of this pandemic, the economic news in the developed world is dominated by inflation. Prices in the US are rising at their fastest rate in almost 40 years, with inflation at 7% year-on-year in December. Beyond the United States, the Organisation for Economic Cooperation and Development, which represents more than 30 of the world’s largest economies, said that inflation among its members had hit its highest rate in 25 years at the end of last year. If this inflation was being driven by pent-up lockdown consumer demand for goods alone, the possibility that this high inflationary environment might disappear as normality returned. But as it is, a worldwide squeeze on energy supplies has pushed the price of gas prices up to unprecedented levels – in the UK, gas prices are expected to increase by more than 50% this year.
The situation has led policy makers in central banks to hint to the financial markets that they will start increasing interest rates – in the case of the US, the Federal Reserve is expected not only to increase interest rates but also to significantly reduce its bond holdings. It is no surprise that the markets have performed badly in January – the US S&P 500 was down 7%, BTC was down 19% and KLCI was down 3% since the end of 2021. Gold, on the other hand, hasn’t done so badly – it is up 0.2%.
So what’s in store for gold for the rest of the year?
I am going to let you decide for yourself. If you think that:
- The ongoing bottlenecks in the global supply chain will be fixed, and energy prices will fall back to pre-pandemic levels;
- Policy makers will be able to reduce inflation to pre-pandemic levels; and
- The geopolitical risks (take your pick – US /China trade, Turkey, Russia/Ukraine, Taiwan, etc) are not going to get any worse,
then gold will likely do badly in 2022. If, on the other hand, you are pessimistic about these 3 factors, then gold will likely do well.
As I have said on previous occasions, I personally like gold because it is my investment insurance – and so I always hold gold because I always want to have some insurance.
1. Source: investing.com
2. All figures are based on RM