It is not one or two, but three interest rate hikes that the US Federal Reserve has indicated for 2022 in its recent meeting. This is a sentiment weakening for gold, a non-interest bearing asset class. The US Fed previously considered inflationary pressures to be transitory. “However, they now seem to prioritize restraining high inflation and have indicated an accelerated pace of reducing monthly bond purchases, which will pave the way for earlier rate hikes in 2022. Fed switching gear and With the era of easy money, Sugandha Sachdeva, Vice President, Commodity and Currency Research, Religare Broking Ltd, said, “This will not be a favorable backdrop for gold prices.”
Simply put, rising rates will limit gains in the yellow metal as it increases the opportunity cost of holding gold, Sachdeva said.
Debjit Saha, principal metals analyst at Refinitiv, a London Stock Exchange group business, said: “When the US Fed decides to hike interest rates, there is a definite possibility that gold as an investment option may lose some of its sheen. Investors can start liquidating their holdings in Exchange Traded Funds (ETFs) at higher levels.”
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Overall, the outlook for gold prices in 2022 looks slightly bearish. According to Saha, gold prices may move higher towards $1,568 an ounce and higher levels towards $1,876 an ounce.
Currently, the domestic gold prices are around . are around 48,000 per 10 grams. In the international market, the yellow metal is trading at around $ 1,800 an ounce. So far this calendar year, gold has given a negative return of 4% in local currency terms.
In comparison, the major benchmark equity index Nifty 50 has gained 21 per cent. One reason for gold’s sluggish performance in 2021 appears to be that investors have adjusted their expectations for the Fed and other central banks.
Recall that gold prices hit an all-time high in 2020 as global central banks lowered interest rates to historic lows with substantial stimulus in the backdrop of a raging coronavirus crisis.
Demand for gold, especially as an investment option, was strong amid the pandemic due to its safe-haven status. In 2021, prices saw some reduction on the declining risk of epidemics and the increasing pace of vaccination.
For a large part of 2021, interest rates remained unchanged. However, some emerging market central banks such as Brazil and China have recently increased their prime lending rates. The Bank of England was the first developed economy country to raise interest rates by 15 basis points in December. One basis point is 0.01%.
Meanwhile, the impact of interest rate hikes will be felt on the dollar and treasury yields, both of which have an inverse relationship with gold prices. The prospect of a recovery in the US economy and thus rising interest rates would mean a stronger dollar, which does not bode well for gold bulls.
Even though the hike in interest rates by the US Fed will be gradual, the bond market is already seeing an impact, with yields rising in India and the US.
On the other hand, the scenario of the Omicron version becoming a more serious health risk than the current estimate could help gold regain its luster. According to Warren Patterson, Head of Commodity Strategy at ING, “Precious metals are most likely to struggle in 2022. The only scenario where we see further upside in gold prices is if we do a U-turn on tightening central banks.” Let’s see. A possible catalyst for this would be even more severe waves of COVID-19.”
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