Investment

Gold in 2022: “will reclaim its title as a haven for newly-minted billionaires”

Central banks have resisted the lure of bitcoin and lifted their gold reserves to levels not seen since 1990.

Their purchases failed to stimulate the gold price in 2021, which saw it drift off 4% and get marooned at $1,800 through much of the period – its worst performance in six years – as investors switched to cryptocurrencies.

The lack of interest in gold among financial operators has also provided central banks with an opportunity to buy the yellow metal without moving its price

The threat of conflict in Ukraine was a factor in lifting gold prices to their highest finish in seven weeks, early in 2022. The pandemic, inflation and energy shortages also caused concern, graphically illustrated by riots in Kazakhstan.

Financial investors still see crypto as a better source of profits than gold. In its latest research, Goldman Sachs said crypto would continue to steal market share from gold meaning the price of bitcoin could double to $100,000. Analysts say the growing use of blockchain applications in NFTs and the metaverse could also boost cryptocurrencies.

In contrast, governments led by China and Russia tend to be hostile to crypto whose trading could interfere with domestic plans to launch digital currencies. 

More than 80 countries, led by China, are more interested in rolling out their own digital currencies, which could persuade central banks to sell dollars and buy gold.

Central bank gold reserves have risen to 35,530 tons by 2021, against 30,000 tons a decade ago. Many central banks have cut their dollar weightings. 

The Russian National Wealth Fund abandoned the US dollar last year and lifted its gold allocation to 20%. Its central bank has also been a gold buyer alongside Uzbekistan, Kazakhstan, Poland and Hungary, whose central bank recently expressed concern over risks in the global economy. The Indian and Brazilian central banks were net buyers in 2021. There was also rising demand for gold jewellery in Asia.

The lack of interest in gold among financial operators has also provided central banks with an opportunity to buy the yellow metal without moving its price.

Threats of global unrest can be exaggerated in the media but stock markets like to travel hopefully, blind to wars until they finally break out. When this happens investors are caught on the back foot and panic into gold plus US Treasuries. 

This could suck liquidity out of crypto and trigger its fall. Like gold, bitcoin has already failed as an inflation hedge because it cannot pay dividends or interest payments when central banks hike interest rates to control inflation.

Legendary Morgan Stanley strategist Byron Wien does not like all this uncertainty. In his 2022 forecast, he accepts crypto could grow its market share but believes gold is overlooked and will rise in price by a fifth in 2022: “It will reclaim its title as a haven for newly-minted billionaires.”

He also predicts a rise in the oil price to $100 a barrel, wage pressures, falling bonds, soggy stock markets, tough ESG regulations and a lithium shortage due to Chinese control of the market. The energy shortage could also lead to a new era for US nuclear power, he adds.

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