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. Silver ended 2021 with a decline of 11.5%, logging the metal’s sharpest decline since 2014.
Although precious metals are known as inflation-heading assets, the duo failed to meet investors’ expectations last year despite a sky-high inflation rate. The reopening trade, fast economic growth, pent-up demand, a solid stock market, the rising greenback and chances of a hawkish Federal Reserve weighed on gold prices.
Investors now will be curious to know what lies in store for gold ETF investing in 2022. Let’s figure out the pros and cons of gold investing.
Muted Stock Market Returns Likely in 2022?
The S&P 500 is now more than 100% 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.
The first week of 2022 came out as somber for Wall Street as the S&P 500 lost 1.9%, the Dow Jones skidded 0.3%, the Nasdaq Composite lost 4.5% and the Russell 2000 was off 2.9% due to rising rate worries. If the market remains dull due to overvaluation concerns or profit booking, gold will see some opportune moments.
Per Wells Fargo, “gold’s path higher looks clearer in 2022. Moderating equity market returns and inflation concerns may bring the market’s focus and flows back to the yellow metal…[the] greenback will not be a substantial headwind in 2022 as it was in 2021….[but] a stronger price trend may take some time to develop,” as quoted on Kitco. Wells Fargo’s year-end 2022 target range for gold is $2,000-$2,100. This would mark about 14.7% gains in gold from the current level.
Mutations of Virus
The infection of a new coronavirus strain, namely Omicron, had a considerable impact on Wall Street when it was first found in South Africa. Even if we can handle Omicron as of now as the strain is milder in nature, 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. All these factors can brighten up the safe-haven trait of gold.
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, in fact, negative, due to rising inflation. 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.
ETFs in Focus
Against this backdrop, investors can keep track of regular gold ETFs like SPDR Gold Shares (GLD), iShares Gold Trust IAU, Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL) and SPDR Gold MiniShares Trust GLDM, and leveraged ETFs like DB Gold Double Long ETN DGP and ProShares Ultra Gold UGL.
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, the stock market rally has not lost its momentum fully and Omicron is still under control. Gold investors should closely watch the economic and market events before taking any decision.
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iShares Gold Trust (IAU): ETF Research Reports
ProShares Ultra Gold (UGL): ETF Research Reports
DB Gold Double Long ETN (DGP): ETF Research Reports
SPDR Gold MiniShares Trust (GLDM): ETF Research Reports
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