Superstar Wealth Depth: Whether fed interest rate hike expectations can make gold worse

The Fed's monetary policy will be key to guiding the direction of gold prices in 2022, especially after a hawkish shift at the end of the year. This begs a key question – can gold cope with more aggressive central banks after an already depressed year? At its December meeting, the Fed announced it would double the pace of its reduction to $30 billion a month, which would end the Fed's asset purchase program in early 2022. The Fed cites inflation problems and a strong economic recovery as the main reasons for the shift in policy. Superstar Wealth believes that when the Fed announced its acceleration plan, gold eventually rose unexpectedly because much of the information was already largely priced.

Fed Chairman Jerome Powell told reporters last December that such a monetary policy shift 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 plot also shows that Fed officials now expect a three-quarter basis point hike in 2022. Another standout point is that the Fed has stated that it will not raise rates until the reduction is complete. According to the latest forecasts, the Fed expects real GDP to grow by 5.5% in 2021 and 4% in 2022. The central bank's PCE inflation forecast was revised up to 2.6 percent from 2.2 percent in 2022. Superstar Wealth said other central banks had also taken a tougher stance, including the Bank of England and the Bank of Canada.

Most central banks will tighten policy next year, but the extent to which our views are digested by markets varies. Interest rates in the U.S. are expected to increase at a rate similar to the market next year (and at a much faster rate in 2023). But in several other countries, including the United Kingdom, Australia, Brazil and South Africa, Superstar Wealth believes the pace of tightening will be slower than investors currently expect, with interest rates in the eurozone and Japan expected to remain at current all-time lows. We believe that Chinese Bank will lower its policy rate.

Is this a bad environment for gold?

After a 3.7 percent drop at the end of the year (gold's worst year since 2015), analysts are now divided on whether the more aggressive Fed will hurt prices in 2022. Some expect to fall to $1600 by the end of the year, while others do not rule out a return to record highs. Superstar Wealth said the perfect conditions for gold's rally largely lagged behind precious metals, including accommodative monetary policy, low interest rates, high inflation and massive fiscal support.

The Fed's ability to control inflation or restore it to a comfortable level of 2%-3% will take some time. For now, for the market, the rate hike is still the story of late 2022. That would be the gap between the two expectations for shrinking asset purchases, which is a separate issue compared to the rate hike cycle. This will be a more important factor that needs to be paid particular attention to the gold market. During 2022, the easing of super-accommodative central bank policy will be the most bearish for gold and silver, from an average of $1765/oz in the first quarter, and gold prices will fall steadily next year to an average of $1520/oz in the fourth quarter. Superstar Wealth believes that even now, the five-year breakeven inflation rate is still close to 2.5%-2.7%, which means that the market is pricing inflation at nearly 2.5% instead of 6.5% five years later. This includes expectations of aggressive Fed drawdowns and multiple rate hikes. But, Eliseo said, it remains to be seen whether inflation can return closer to the Fed's 2 percent target.

This article originated from the financial world