Today we consider gold, the metal that the world
loves to wear but is less keen on investing in, and we ask:
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. Gold is one of those investments where
my words and deeds are at odds with each other.
I’m heavily invested, both in the physical metal and the miners. My utterances, however,
tend to be rather more circumspect, especially so over the past year or so,
as people who follow me will know. Too many years of unfulfilled potential, I guess.
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. This week’s action brought that magic number
ever closer. Gold, along with all the other precious metals (PMs) is having a good time.
Silver has been leading the way, advancing forward a couple of days ahead of the other PMs.
That is a good sign. It is the most speculative
of the PMs 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. Bear in mind
when you look at long-term charts any patterns you see, whether bullish or bearish,
take a long time to pan out.
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 exactly what it says on the tin: 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 that see such patterns as gospel, and many more that see them as
mumbo jumbo. But they can be useful.
So let us turn to the fundamentals, the most obvious being inflation.
It’s everywhere. The UK 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 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 they will “fix” inflation by tightening their controls. We are already hearing
President Biden and Vice President 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 LBMA’s
annual forecasting competition. 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.
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I’ll be back with another video very soon. In the meantime, cheerio.