High on the list, perhaps in the top spot, of disappointing assets in 2021 there is gold. Using the SPDR Gold Shares (NYSEARCA:GLD), the world's largest gold-back exchange traded fund, as the measuring stick, bullion has been an abject disappointment this year.
As of Dec. 17, GLD is lower by almost 6% year-to-date. Things weren't supposed to be this way. They shouldn't be. Interest rates are low. Commodities prices are soaring. Inflation is running hot. It should be a perfect storm for gold, but returns prove otherwise.
Sure, gold was an impressive performer in 2019 and 2020, returning an average of 21.5% in those years. However, that doesn't explain bullion's 2021 lethargy. Any asset can maintain a three-year winning streak, but gold isn't doing that this year.
No promises, but 2022 could bring a resumption of gold's uptrend. Unfortunately, the coronavirus isn't going anywhere and could cause equity market volatility. The same can be said of inflation. Global supply chain issues could linger as well. Those headwinds could benefit bullion in the new year even if the Federal Reserve raises interest rates.
Why Gold Can Glitter in 2022
Working on the premise that the global economy will be sturdy next year, gold could get a lift from that scenario. While the U.S. economy is likely to move on to the expansion phase of the cycle, there are still recoveries to be had in Europe and some major developing economies, which could portend upside for cyclical gold assets.
Like the U.S., Europe is entering the recovery phase. Add to that, China and India, two of the biggest markets for gold jewelry purchases, could see upticks in consumer spending next year and that could support a rally for the yellow metal.
“Recovery in these four economies remains key for gold next year as these are some of the most important markets for gold jewelry demand — particularly India, China and other emerging markets. Gold demand among jewelry and technology through Q3 2021 has already matched full-year 2020 total demand in these sectors,” according to State Street Global Advisors (SSGA). “Expectations for full-year 2021 gold cyclical demand to return to pre-pandemic levels are high with this trend potentially continuing throughout 2022 as part of a base case scenario outlook for gold.”
Of course, interest rates will factor into the gold equation next year. Clients that are somewhat knowledgeable regarding gold might think Fed tightening will be a drag on the yellow metal. After all, it doesn't offer a dividend or coupon payments. However, real yields tell a different story.
“Since Q1, the combination of declining Treasury yields and rising inflation expectations has kept real yields effectively unchanged from where they began 2021,” adds SSGA. “Elevated inflation alongside Fed tightening that is likely to remain behind the curve may indicate continued expectations for lower real yield levels.”
Bottom line: Higher interest rates don't have to doom gold, but many clients aren't aware of that.
What Motivates Gold Buyers
As advisors know, it pays to understand what motivates gold buyers. Many clients do realize this, but it's easily conveyed, particularly because many of those factors are in place today and should remain that way well into 2022.
“Inflation has been a growing risk for investors in 2021 and will likely remain so in 2022,” notes SSGA. “Rising commodity and energy prices, global supply chain bottlenecks, and labor supply and demand mismatches are likely to persist and contribute to an elevated inflationary environment, particularly compared to the low inflationary regime of the prior decade.”
What makes gold attractive against the inflationary backdrop is that it has catching up to do relative to its history. Typically, when the Consumer Price Index (CPI) runs above 5%, as is the case today, gold soars.
“Gold does keep up with price fluctuations over time, but historically it tends to stand out during extreme price levels as a potential store of value. In fact, over the last 50 years gold has provided an average annual real return of 12.7% when US CPI exceeded 5%, compared to negative returns on average for both US equities and bonds,” concludes SSGA.