Today we consider gold, the metal that the world loves to wear but is less keen on investing in. What is the outlook for gold in 2022?
Look at what he does, not at what he says, is one of those useful maxims for life. Actions speak louder than words and all that – and gold is one of those investments where my words and deeds are at odds with each other.
If actions speak louder than words, I’m a gold bull
I’m heavily invested, both in the physical metal and gold miners. My utterances, however, tend to be rather more circumspect, especially so over the past year or so, as regular readers will know. Too many years of unfulfilled potential, I guess.
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The problem gold has, as I am forever saying, is that it is the ultimate analogue asset in a world where all the value is digital. With this incredible boom in tech we have seen over the last decade, this has been especially apparent.
But I have also been forever saying that it’s time will come, and perhaps that time is 2022.
In my predictions piece at the beginning of the year I said that gold would go above $2,000 an ounce. Yesterday’s action brought that magic number ever closer. Gold, along with all the other precious metals, had a good day.
Silver has been leading the way, advancing forward a couple of days ahead of the other precious metals. That is a good sign: silver is the most speculative of the precious metals and when it leads, it augurs well – it means capital is entering the arena.
The $1,800 area has been a magnet for gold. Since last summer, any advance that gold has made has quickly run out of steam and gold has returned to the $1,800 zone.
But by the same token, gold’s sell-offs have been muted, and slides below $1,800 have also soon run out of steam with gold soon bouncing back.
The result has been what technicians might call “coiling action”. The tighter the noose gets around $1,800, the more pronounced the eventual spring will be, whether up or down. Let us hope it is up.
Looking at the bigger picture, below we see a chart of gold going back to 2007.
On the one hand I can see price action over the past couple of years that is worryingly similar to the pattern gold made after it’s 2011 high, which led to many years of horrible bear market. I have circled these in red.
On the other I see a cup-and-handle pattern traced out over many years. I have defined this in green. I hope this is clear in the chart below.
The cup and handle formation is a pattern in the price action that resembles a cup, with the handle of the cup to the right. It is a famously bullish pattern, especially when traced out over many years, as is the case with gold here.
There are many who see such patterns as gospel, and many more who see them as mumbo jumbo. But they can be useful.
Inflation suggests that gold should already be a lot higher
So let us turn to the fundamentals, the most obvious being inflation. It’s everywhere: UK inflation is now at 5.4%, the highest level in 30 years, while in the US it is at 7%; it’s at 5.2% in the EU and it’s really hotting up in Latin America too.
Gold is the go-to asset during inflation – see the 1970s for more details. Except that this latest bout of inflation has been known about for many months, if not years, and gold has not been trading as it is traditionally supposed to. Maybe the narrative is changing.
I’ve got to say: I really like the look of that gold chart.
I was speaking to my old pal James Turk yesterday, founder of Goldmoney, about his new book Money and Liberty: In the Pursuit of Happiness & The Theory of Natural Money, which, by the way, is excellent. (James’s The Coming Collapse of the US Dollar was one of the first books I ever read on investing back in 2006 and I still regard it as the one the best.)
James is one of the most knowledgeable people in the gold space and he had this to say on gold in 2022: “Inflation is tightening its grip on the global economy as a consequence of central banks conjuring up currency to fund government deficits. So I expect higher gold prices in the year ahead as people inevitably turn to gold to safeguard the purchasing power they have earned and saved, just like I remember from the 1970s."
So how are governments going to react to all this inflation? Are they going to put up interest rates, tighten monetary policies, shrink the state and cut spending? They might put up rates a little – if only for the bragging points. But rates at 5%, 6% or 7%? No chance!
And there’s no chance they are going to shrink and tighten the rest of their activities, either. So we are going to remain in this environment of negative real rates.
Far more likely is that they will “fix” inflation by tightening their controls. We are already hearing US president Joe Biden and vice president Kamala Harris blame greedy merchants, suppliers and companies for inflation, instead of the Federal Reserve.
In the 1970s we saw price controls, rent controls and even profit controls in the form of windfall taxes. Here in the UK the government is already looking at ways to intervene in energy markets by paying energy suppliers in order to protect consumers from price rises. You think suppliers won’t put up prices even more if government is paying them?
So there are many echoes of the 1970s already. I see the reaction to inflation being more intervention and control, rather than less spending and higher rates.
Stocks did not do very well in that environment; gold did.
I also spoke to Ross Norman who is the most successful forecaster in the annual forecasting competition held by the London Bullion Market Association (LBMA). He, like me, observes that gold should have been making its move sooner and quicker, given all the inflation.
Ross forecasts – and I’ve rounded his numbers – an average price this year of $1,760 for gold and $21 for silver, with platinum at $1,070. He is clearly feeling circumspect too. That said, I spoke to him before yesterday’s move – and perhaps he might revise his forecasts, given what happened.
To conclude, I still think we’ll see $2,000 gold this year.
Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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