Gold didn’t shine in January. The struggle could continue, although the more distant future looks more optimistic for the yellow metal.

That was quick! January has already ended. Welcome to February! I hope that this year has started well for you. For gold, the first month of 2022 wasn’t particularly good. As the chart below shows, the yellow metal lost about $11 of its value, or less than 1%, during January.

This is the bad side of the story. The ugly side is that gold wasn’t able to maintain its position above $1,800, even though geopolitical risks intensified, while inflation soared to the highest level in 40 years! The yellow metal surpassed the key level in early January and stayed above this level for most of the time, even rallying above $1,840 in the second half of the month. But gold couldn’t hold out and plunged at the end of January, triggered by a hawkish FOMC meeting.

However, there is also a good side. Gold is still hovering around $1,800 despite the upcoming Fed’s tightening cycle and all the hawkish expectations about the US monetary policy in 2022. The Fed signaled the end of tapering of quantitative easing by March, the first hike in the federal funds rate in the same month, and the start of quantitative tightening later this year. Meanwhile, in the last few weeks, the markets went from predicting two interest rate hikes to five.

Even more intriguing, and perhaps encouraging as well, is that the real interest rates have increased last month, rising from -1% to -0.6%. Gold is usually negatively correlated with the TIPS yields, but this time it stayed afloat amid rising rates.

Implications for Gold

What does gold’s behavior in January imply for its 2022 outlook? Well, I must admit that I expected gold’s performance to be worse. Last month showed that gold simply don’t want to either go down (or up), but it still prefers to go sideways, glued to the $1,800 level. The fact that strengthening expectations of the Fed’s tightening cycle and rising real interest rates didn’t plunge gold prices makes me somewhat more optimistic about gold’s future.

However, I still see some important threats to gold. First of all, some investors are still underpricing how hawkish the Fed could become to combat inflation. Hence, the day of reckoning could still be ahead of us. You see, just today, the Bank of England hiked its policy rate by 25 basis points, although almost half of the policymakers wanted to raise interest rates by half a percentage point. Second, the market seems to be biased downward, with lower and lower peaks since August 2020.

Having said that, investors should remember that what the Fed says it will do and what it ends up doing are often very different. When the Fed says it will be dovish, it will be dovish. But when the Fed says it will be hawkish, it says so. This is because a monetary tightening could be painful for asset valuations and all the debtors, including Uncle Sam. The US stock market already saw significant losses in January. As the chart below shows, the S&P 500 Index lost a few hundred points last month, marking the worst decline since the beginning of the pandemic.

Thus, the Fed won’t risk recession in its fight with inflation, especially if it peaks this year, and would try to engineer a soft-landing. Hence, the Fed could reverse its stance relatively soon, especially that it’s terribly late with its tightening. However, as long as the focus is on monetary policy tightening, gold is likely to struggle within its tight range.

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Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.