Gold bullion ETF SPDR Gold Shares (GLD Quick QuoteGLD - Free Report) was up 17.6% in 2019 and 24.4% in 2020. So far this year, the bullion ETF has lost 7.24% against 23.4% gains in the S&P 500. While 2021 has been downbeat for gold, 2022 could bring luck for the yellow metal. Let’s delve a little deeper.

High Inflation; Real Yield to Remain Low in 2022

Gold normally underperforms in a rising rate environment. With the Fed likely to turn hawkish in 2022, many fear that a gold rally may not be possible. But investors should note that real yield is still low, in fact, negative, due to rising inflation.

As of Dec 14, 2021, the benchmark real treasury yield was negative 0.98%, though the negativity lessened over the course of the month as December opened with a real yield of negative 1.01%. With inflation likely to stay strong in early 2022 due to virus-led supply chain disruptions, we expect gold to gain as the metal is known as an inflation-protected asset.  

Commerzbank also sees 2022 as a year for gold, per kitco.com. Its report said that “in the United States, inflation is currently at a 39-year high of 6.8%, in Germany at more than 5%, the highest level in 29 years, and in the Eurozone at 4.9%, the highest since the start of the monetary union in 1999.”

Market participants do not expect “inflation to return to the Fed's 2% inflation target in the medium to long term. Should the higher inflation become entrenched and the central banks fail to react appropriately to it, gold would probably benefit from this as an inflation hedge,” per Commerzbank.

The bank also highlighted that according to a study by the World Gold Council, gold holds its head high with its price performance in phases of high inflation (inflation >5%). Even with inflation rates between 2% and 5%, the performance of gold is considerably positive.

Overvaluation Concerns in Markets

The S&P 500 is now about 107% higher than its low in March 2020. The Nasdaq too has more than doubled since then. Although there are reasons for such a rally as vaccine distribution boosted the possibilities of faster-than-expected recovery, the bubble fear is also brewing. Faster Fed policy tightening amid surging price inflation may also curtail the momentum of the stock market rally. If the market crashes on profit booking or overvaluation concerns, gold will see some opportune moments.

Gold: An Undervalued Asset? + Mutations of Virus

Gold is now a relatively cheap investment opportunity with losses so far in 2021. If the equity rally halts and corrects ahead on new COVID-19 variants or overvaluation concerns, one may find safety in gold investing.

The infection of a new coronavirus strain, namely Omicron, has had a considerable impact on Wall Street. Europe enacted lockdown due to rising virus cases.

Even if we can handle Omicron as of now, mutations of the virus will continue to throw the global market occasionally in a wavering zone. The central banks will not likely be of much support anymore and massive fiscal support is also unlikely.

ETFs in Focus

Against this backdrop, investors can keep track of regular gold ETFs like GLD, iShares Gold Trust (IAU Quick QuoteIAU - Free Report) , Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL Quick QuoteSGOL - Free Report)  and SPDR Gold MiniShares Trust (GLDM Quick QuoteGLDM - Free Report) , and leveraged ETFs like DB Gold Double Long ETN (DGP Quick QuoteDGP - Free Report)  and ProShares Ultra Gold (UGL Quick QuoteUGL - Free Report) .

Bottom Line

Having said this, we would like to note that the current scenario is not in favor of gold investing fully as the greenback is gaining strength, the stock market is still rallying and Omicron is still under control. Gold investors should closely watch the economic and market events before taking any decision.