A new year. New beginnings. Fresh hopes.
So what’s in store for gold in 2022? There are so many factors that will influence its performance in 2022 – so many factors that make holding gold so necessary for people in Malaysia. But I will only focus on one – policy decisions led by the US.
The market expects the US Federal Reserve to take the lead and begin winding down their pandemic-era economic support measures. And, more importantly, in the case of the US to raise interest rates. If this were to unfold, the impact of these actions on global investors e.g. the rich is very different from the impact on ordinary people. Market commentators, however, typically analyse these impacts from the perspective of global investors. And it goes like this. The higher the US Fed raises interest rates, the higher the interest rate for fixed deposits in banks go up. So rich investors see putting money in the bank commensurately more attractive than keeping it in gold which has storage costs.
However, this is not true for the rest of us – especially in emerging markets like Malaysia. For us, the more the interest rates in the US goes up, the more likely global investors will move their money to the US instead of Malaysia. The stronger the US dollar will become and the weaker the Malaysian ringgit will become – we will be able to buy less with the ringgit we save in our banks. If the US raises their interest rates high enough, this will also have an adverse effect on our stock market because global investors will choose to buy US interest earning investments like bonds over our local equities.
That said, I personally believe that central banks are so worried about how investors react to any cooling measures that policymakers will likely continue not to take drastic measures to raise rates and pump the brakes on growth. In this scenario, investors will continue to invest heavily in key markets and to ignore emerging markets like Malaysia. Under this scenario, Malaysia will still unfortunately suffer from a lack of attention from the global investing community. As a result, the ringgit and the KLCI will remain lacklustre and gold will perform well – relative to them
So. Whether 2022 unfolds as many in the market expect or as I expect, gold will strengthen against the ringgit even as it weakens against the US dollar. That said, we might still have to wait for gold to take off – 2022 could be another rerun of 2021. But just like it showed in 2021, I expect gold to perform better than the ringgit and the KLCI – again demonstrating that it is the most convenient hedge that we have. For Malaysians who are unable to invest in international equities, gold will be one of the few options they have available to diversify out of Malaysia.
And I haven’t even talked about what might happen if the Covid-19 endemic is prolonged or if the geopolitical tensions in Asia and in Europe take a turn for the worse. Stay safe and let’s hope for a better 2022!