The year 2021 was downbeat for precious metals. Gold closed out 2021 with a loss of 3.6%, marking its biggest annual decline since 2015. Although precious metals are known as inflation-heading assets, gold failed to meet investors’ expectations last year despite a sky-high inflation rate. The reopening trade, fast economic growth, solid pent-up demand, a strong stock market, the rising greenback and chances of a hawkish Federal Reserve weighed on gold prices.
Though the year 2022 has been extremely downbeat for stocks so far, gold could not post a blockbuster performance either. The biggest gold bullion ETF
SPDR Gold Shares ( GLD Quick Quote GLD - Free Report) is off 0.9% this year compared with a 17.7% decline in the S&P 500. Still, the yellow metal went a long way in protecting investors’ assets.
Investors now will be curious to know what lies in store for gold ETF investing for the rest of 2022. Let’s figure out the pros and cons of gold investing.
Positives Muted Stock Market Returns Likely in 2022?
Wall Street was off to the worst start to a year since 1939 and the global market selloff will continue, according to Bank of America Corp. and Morgan Stanley, as quoted on Bloomberg. After an awful first quarter, the month of May is also proving rough for the markets, mainly due to the Fed’s biggest interest rate hike in 22 years amid surging price inflation. Markets are pricing in another 190-basis-point rate hike in 2022.
Analysts are of the view that the S&P 500 may slump further. Even though it has declined 17% to start 2022, the S&P 500 trades at 16.8 times its projected earnings over the next 12 months, which is still above the average multiple of 15.7 over the past 20 years, according to FactSet, as quoted on Wall Street Journal.
Companies this earnings season have been mentioning “weak demand” at the highest rate since 2020, according to BofA Global Research, as mentioned on WSJ. If stocks continue to fall, safe-haven metal gold may gain as investors may look for safety. Plus, gold may gain strength as an alternative way of investment (read:
Will Defensive ETFs Gain Further as S&P 500 Lull Not Over Yet?). Geopolitical Crisis; Supply Chain Issues: Global Growth Slowdown
The Russia-Ukraine war and rising Covid cases in China are causing severe supply chain issues. This along with global interest rate hikes may result in severe growth slowdown globally. These slowdown worries might bolster gold’s safe-haven demand.
"One must make a few assumptions about Ukraine's war. We do not think that it will be fully resolved during 2022 and therefore current precious metals prices will be quite different vs. our original forecasts earlier this year," said MKS PAMP head of metals strategy Nicky Shiels, as quoted on kitco.com.
Mutations of Virus
The infection of a new coronavirus strain had a considerable negative impact on Wall Street in previous waves. Even if we have handled the latest strain Omicron, further mutations of the virus may 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. All these factors can brighten up the safe-haven trait of gold.
Negatives Rising Rates
Gold normally underperforms in a rising rate environment as it is a non-interest-bearing asset. With the Fed likely to turn more hawkish in 2022 and raise rates, many fear that a gold rally may not be possible. But some investors are hopeful of the fact that real yield is still low. Hence, gold might stay afloat on this ground as long as inflation is hot due to global supply chain disruptions. We believe inflation will run high in the first half of 2022.
As rates are rising this year in the United States, the U.S. dollar has been gaining strength. This is a negative for gold as the metal is priced in the U.S. dollar. Hence, the metal shares an inverse relation with the greenback.
Gold Price Projections
Gold has the potential to hit $2,500 an ounce and average $2,000 an ounce in 2022 from the current level of $1813 (at the time of writing), according to the updated outlook from MKS PAMP,
as quoted on kitco.com. ETFs in Focus
Against this backdrop, investors can keep track of regular gold ETFs like
SPDR Gold Shares ( GLD Quick Quote GLD - Free Report) , iShares Gold Trust ( IAU Quick Quote IAU - Free Report) , Aberdeen Standard Physical Swiss Gold Shares ETF ( SGOL Quick Quote SGOL - Free Report) and SPDR Gold MiniShares Trust ( GLDM Quick Quote GLDM - Free Report) and GraniteShares Gold Shares ( BAR Quick Quote BAR - 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 in solid shape. Gold investors should closely watch the economic and market events before taking any decision.