Gold records biggest fall since 2015

Despite consumer prices hitting a nearly four-decade high in November, gold ended the year with its biggest fall since 2015, disappointing investors who bet on the metal to protect their portfolios from inflation.

The most actively traded gold futures fell nearly 3.5% in 2021 to about $1,828.60 per troy ounce, well below investor expectations for the Federal Reserve’s response to the price hike. An accelerated pace of monetary hardening means increased competition from yield-bearing assets such as bonds.

Investors reward gold as a stable store of value and often use it as protection against fluctuations in stock or consumer prices. But it doesn’t provide any income, so it struggles when rates go up. Recent signs from the Fed have raised bets that the central bank will act aggressively to quell inflation. This has propelled the yield on the two-year Treasury, which typically climbs when investors expect tougher policy from the central bank, to its highest level since the initial pandemic.

The fall comes from record territory, as concerns over coronavirus cases helped send the price to a high of around $2,050 in August 2020. Gold has fallen nearly 11% since then. Prices climbed to a five-month high in November, with data showing surprisingly persistent inflation, but hopes that Fed policy will rapidly slow inflation helped keep gold in a relatively narrow range around $1,800 Is.

Gold’s weak performance—in a year where other commodities have skyrocketed and the S&P 500 climbed a record 70—raises concerns about bigger challenges ahead. In December the Bank of England became the first major central bank to raise rates since the pandemic began.

“Theoretically on paper, this should have been an exceptionally strong environment for gold prices, yet they are ending the year lower than where they started,” said Chris Vecchio, senior strategist at DailyFX. “I’m really hard-pressed to think that if gold prices don’t pick up significantly in 2021, how will things get better going forward?”

The fall has put pressure on mining stocks. The VanEck Gold Miners ETF is set to end the year down 11%, while the S&P 500 is up 27%. US-listed shares of Barrick Gold Corp fell 17%, while Colorado-based Newmont Corp gained 3.6%. Miners’ shares tend to be more volatile than gold prices themselves.

Some analysts said the cryptocurrency craze could also hurt gold. Some crypto backers offer bitcoin as an inflation hedge, although it suffers from constant volatility and has not been tested during any prolonged recession or inflationary episodes. Mr. Vecchio recommends that investors reduce their gold holdings from 5% to 3% and instead allocate 2% to cryptocurrencies.

Wilshire Phoenix partner Wade Guenther expects gold to trade between $1,700 and $1,775 for most of 2022. They think rising rates will strengthen the dollar, which could hurt gold by making it more expensive for buyers outside the US.

“With interest rates, inflation and the dollar, we expect returns for gold to be somewhat muted through the entirety of next year,” Mr. Gunther said.