Institutional Outlook: The Fed's interest rate hike cycle is approaching, can gold withstand the pressure in 2022?

Spot gold rebounded slightly in early Asian trading on Tuesday (January 4, 2022). On Monday, the first trading day of 2022, gold and silver prices fell sharply by more than 1.5%. Bearish factors such as a strong rise in the US dollar index and a sharp rise in US Treasury yields have a negative impact on precious metals. Faced with the prospect of tightening monetary policy by the Federal Reserve and major global central banks in 2022, major investment banks have made predictions for the trend of the gold market.

Inflation soared As the Federal Reserve began to close in, the market is expected to raise interest rates as early as March

At its December 2021 meeting, the Fed announced it would double its downsizing to $30 billion a month, which would end the Fed's asset purchase program in early 2022. The bank said that the high inflation problem and the strong economic recovery were the main reasons for the policy shift. When the Fed announced an accelerated reduction, the price of gold rose unexpectedly because most of the information was already largely reflected in the price.

Fed Chairman Jerome Powell told reporters in December 2021 that a change in monetary policy was "very appropriate" given the current state of the U.S. economy, inflation and wages. "The price increase has now spread to a wider range of goods and services," he said. The updated dot chart also shows that Fed officials are currently expecting three rate hikes of 25 basis points each in 2022.

Another striking point is that the Fed noted that it would not raise interest rates until the downsizing of its purchases was over. "Buying assets is increasing easing, and raising interest rates is eliminating easing. Assuming that everything goes according to plan, we will have two more meetings to complete the reduction of the scale of the debt purchases, and if we want to start raising interest rates before that time, we may complete the reduction of the scale of the debt purchases ahead of schedule. But that's not what I want to happen. ”

According to the latest forecasts, the Fed expects real GDP to grow by 5.5% in 2021 and 4% in 2022. The bank's personal consumption expenditure inflation forecast was raised to 2.6 percent from 2.2 percent in 2022.

Other central banks, including the Bank of England and the Bank of Canada, have also taken a tougher stance.

The CME Fed Watch currently forecasts a 57.2% probability of a rate hike in March at the earliest, a second hike in June at 39.8%, and a third hike in September at 28.9%.

Institutional Outlook: When will the Fed raise interest rates? Will the price of gold be hit?

Gold closed in 2021 by 3.7%, the worst year since 2015. Analysts are currently divided on whether the Fed's more aggressive measures will hit gold prices in 2022. Some expect gold to fall to $1600 by the end of the year, while others do not rule out the possibility of gold returning to record highs.

ANZ: In mid-2022, gold prices will begin to fall back to $1600

Daniel Hynes, senior commodities strategist at ANZ, said the perfect conditions for gold's rally were largely behind this precious metal, including accommodative monetary policy, low interest rates, high inflation and massive fiscal support. Hynes expects gold prices to begin to fall back to $1600 in mid-2022 as the Fed begins to raise interest rates to contain inflation.

"With a target of $1,600 for gold and $22 for silver at the end of the year, it's hard to see what really triggers another rally, at least in the short term," Haynes said. The Fed will reduce purchases. The market expects rate hikes in the near future. The outlook for the dollar is sideways. These conditions are not cohesive. In addition to continued inflation, it could be another period of relative price stability. ”

ANZ expects two rate hikes in 2022 as inflation remains high in the first half of 2022. "The Fed's ability to contain inflation or bring it back to a satisfactory 2%-3% level will take a while," Haynes said. For now, rate hikes will still be for the market at the end of 2022. It will be around the gap between expectations of shrinking asset purchases, which I think is a separate issue compared to the rate hike cycle. This will be a more important factor to focus on the gold market. ”

Mega Macro: Most central banks will tighten policy, and core personal consumption expenditure inflation in the United States is expected to be higher than the Fed forecast

Neil Shearing, chief economist at Capital Economics, said: "Most central banks will tighten policy in 2022, but the extent to which our views are reflected in the market varies. We expect U.S. interest rates to rise at a similar rate to the market in 2022 (and faster in 2023). But in several other countries, such as the UK, Australia, Brazil and South Africa, we believe the pace of tightening will be slower than investors currently expect. We expect interest rates in the eurozone and Japan to remain at current all-time lows. ”

Paul Ashworth, chief North American economist at Capital Economics, stressed that the Fed is unlikely to abandon its austerity program in 2022. "We expect price inflation to remain above the 2% target for the next few years," he said. The bigger problem now is that there are clear signs that cyclical price and wage pressures are forming that will continue even longer. We expect core personal consumption spending inflation to be higher than the current forecast of 2.3 percent for Fed officials in 2023. ”

JPMorgan Chase: Gold prices will be hurt by the Fed's interest rate hike, falling to pre-pandemic levels in 2022

Commodity analysts at J.P. Morgan Global Research believe the gold market will not be able to withstand the Federal Reserve's plans to tighten monetary policy in 2022. In its recently released Outlook for 2022, the Bank expects gold prices to fall to pre-pandemic levels by the end of 2022.

Analysts said: "During 2022, the withdrawal of the central bank's ultra-loose policy will be the most complete bearish for gold and silver." The price of gold will steadily decline from an average of $1765/oz in the first quarter to an average of $1520/oz in the fourth quarter of next year. ”

The Fed plans to end its monthly bond purchase program by March and plans to raise interest rates three times. At present, the market has begun to digest the first rate hike in May. However, JPMorgan expects the Fed to raise interest rates in September. As long-term inflation expectations remain good, the central bank's forecast of rising bond yields weighs on gold prices.

Analysts at JPMorgan Chase said: "Given the resilient economic environment, this curve has short-term steepness in early 2022, with the 10-year Treasury yield expected to rise to 2% in mid-year and 2.25% by the end of 2022."" said JPMorgan Chase. Finally, long-term bond yields are also expected to rise, but only barely return to the highs observed earlier this year by the end of 2022. ”

J.P. Morgan, meanwhile, expects the dollar to appreciate by 1.6 percent next year. In terms of growth forecasts, J.P. Morgan expects the global economy to grow by 4.8 percent in 2022, while the U.S. economy will grow by 3.8 percent.

Royal Bank of Canada: Given the prospect of a three-time rate hike in 2022, gold's risks are skewed to the downside

Chris Louney, commodities strategist at RBC Capital Markets, said gold's risks were skewed to the downside given the prospect of three rate hikes in 2022. Analysts at the bank said: "Based on market expectations, there is still room for negative growth in gold prices, and these will become a reality during 2022 - accelerating the reduction of bond purchases, and may start raising interest rates as early as March." That's why, despite gold fluctuating around $200, we never really changed our perspective. We haven't seen a pick-up in investor interest yet. Our annual average price for gold in 2022 is $1695. ”

Standard Chartered Bank: Gold will start to shine after the uncertainty about the Fed's tightening plans is cleared

However, some analysts believe that historically, this precious metal has performed well in the interest rate hike cycle. Suki Cooper, a precious metals analyst at Standard Chartered, said it was time for gold to shine after uncertainty about the Fed's tightening plans had been eliminated.

Cooper said: "Gold prices tend to strengthen after the first rate hike or announcement of a reduction in the size of the bond purchases in the interest rate hike cycle, because historically, the market price has strengthened earlier. She added that it will be crucial that gold eventually move around $1,800 an ounce as it remains a strong resistance level. Standard Chartered does expect gold prices to rise to $1,875 an ounce in the first quarter of 2022.

Perth Mint: Gold tends to perform well after the Fed began its interest rate hike cycle

Jordan Eliseo, director of product and investment research at the Perth Mint, also said: "Gold tends to perform well after the Fed starts its rate hike cycle. Once the Fed completes its plan to shrink its bond-buying program and even raises interest rates faster than expected, I wouldn't be surprised if gold prices bottom out and start moving higher. This could actually be the cause of the rise in the price of gold. One thing worth paying attention to, he noted, is how inflation expectations will change in 2022.

Elisio said: "It is clear that the current inflation impulse will be much stronger than the Fed expected a few months ago. There is a huge gap between the current level of inflation and the level of inflation expected by the market in 5 or 10 years. If markets start to perceive more that inflation will become more persistent, then this will start to create some challenges for policymakers and investors. ”

Even now, the five-year break-even inflation rate is still close to 2.5%-2.7%, which means that the market's expected five-year inflation rate is closer to 2.5% than 6.5%. This includes the expectation that the Fed will drastically scale back its bond purchases and raise interest rates several times. But it remains to be seen whether inflation can return to a 2 percent target close to the Fed's target.

This article originated from Huitong Network