Will Gold Be The Biggest Surprise Of 2022?

Will Gold Be The Biggest Surprise Of 2022?
Stéphane Renevier, CFA

about 2 years ago4 mins

  • With interest rates set to rise, there aren’t many investors expecting gold to do well in 2022.

  • But gold could well surprise investors in 2022: interest rates could end up falling, inflation could stay high, the US dollar could drop, and it might regain some of the market share it lost to bitcoin.

  • Those who want to add gold to their portfolio should consider a cheap ETF, while those wanting to bet on the “surprise” rally could buy long-term out-of-the-money call options on the GLD ETF.

With interest rates set to rise, there aren’t many investors expecting gold to do well in 2022.

But gold could well surprise investors in 2022: interest rates could end up falling, inflation could stay high, the US dollar could drop, and it might regain some of the market share it lost to bitcoin.

Those who want to add gold to their portfolio should consider a cheap ETF, while those wanting to bet on the “surprise” rally could buy long-term out-of-the-money call options on the GLD ETF.

Gold had a pretty tough time of it last year, but that hasn’t stopped Blackstone Private Wealth Solutions’ chief investment strategist from naming the metal one of his “top 10 surprises” of 2022. In fact, he thinks it has the potential to rally as much as 20% in 2022 – a particularly tempting forecast given how extended stock prices look right now. Here are five reasons he might be onto something…

Interest rates could rise… and then fall

It’s true that the market is currently debating how fast the Fed will hike interest rates and how much by, but remember that the narrative can change very quickly. And while the Fed is likely to raise rates in the short term, this may only be temporary: higher bond yields could hurt the economic recovery, which might then force the Fed to cut rates again. Given that gold doesn’t pay any income, those lower rates reduce its “opportunity cost” – i.e. the cost of not investing in something more profitable – and tend to support the metal’s price.

Inflation could surprise us all over again

Inflation has defied expectations this year, proving a lot stickier than economists believed. And that might not change anytime soon: supply chain disruptions might not fully resolve even if the Omicron threat is reduced, higher wages are unlikely to be rolled back, and the clean energy transition is gathering momentum. Add to that the potential for central banks and governments to become ever more experimental with their support measures, and you could get the perfect cocktail for inflation to reach even higher levels. So expect investors to look for inflation-proof assets – enter gold.

The US dollar looks set to drop

A rising US dollar – supported by investors who have strongly favored US assets over those of other regions – has worked against gold in 2021. But as the Fed tightens its monetary policy, investors might soon start looking at other regions for their investments. Throw in the fact that US stocks are extremely expensive versus other regions, and we could arguably see quite a strong rotation out of the US this year. That would put pressure on the US dollar, and reduce the price of gold for foreign buyers.

Investors could flock back to gold

Gold has traditionally been investors' favorite hedge against inflation, but bitcoin stole the show in 2021, leading to record outflows away from the metal and into the cryptocurrency. Those flows, however, are expected to reverse given the recent underperformance of bitcoin. Consider too that while gold is a good hedge against inflation, it’s an even better one against “deflation” – the combination of higher inflation and lower growth. If the global economy moves in that direction, investors might put even more money into gold and drive up its price.

Gold’s outperformance isn’t priced in

Gold’s dismal performance last year shows that few investors are betting on higher gold prices. In fact, Blackstone aside, I don’t think I've seen a single investment bank recommending gold as a top trade for 2022. And that means prices could rise up sharply if the environment turns more positive on the shiny metal. Remember that the less the market is paying attention to an asset, the more likely you are to be surprised by its returns.

So what’s the opportunity here?

With interest rates set to rise and inflation likely to fall, it’s no wonder that so few investors are backing gold. And of course, they may be right.

But investing isn’t just about being right or wrong: it’s about how much you stand to make when you’re right versus how much you stand to lose when you’re wrong. And it seems that right now, gold could have a lot to gain if markets switch to risk-off mode.

So those who want to add gold to diversify their portfolio should consider buying gold via a cheap vehicle like iShares Gold Trust (ticker: IAU, expense ratio: 0.25%) or Aberdeen Standard Physical Gold Shares ETF (ticker: SGOL, expense ratio: 0.17%).

For those wanting to tactically bet on the possibility of a significant rally in gold prices, there could be an even more interesting way of playing that view: buying long term out-of-the-money call options on gold. The advantage of this is that your loss is limited, while your upside will have a lot of embedded leverage. Put simply, you could make multiples of what you risk if you’re right. If you do want to use options, the SPDR Gold Shares ETF (ticker: GLD, expense ratio: 0.4%) – the most liquid of all the gold-based ETFs – might be your best bet.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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