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Gold, Inflation Divorce Hands Bullion Bulls Biggest Annual Loss Since 2015

CommoditiesDec 31, 2021 02:39PM ET
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© Reuters.

By Barani Krishnan

Investing.com - It might have been an overwhelming year for inflation but it was certainly an underwhelming one for gold, one of the most popular hedge against price pressures known to investors.

With readings for the U.S. Consumer Price Index and the Federal Reserve’s preferred inflation gauge — the core Personal Consumption Expenditures Index — both at 40-year highs, gold prices showed their first annual loss in three years.

U.S. gold futures’ most active contract, February, settled up $14.50, or 0.8%, at $1,828.60 an ounce on New York‘s Comex.

For the year, Comex gold fell 4.5% for its sharpest slump since 2015.

The slide also comes after a banner year for gold in 2020 that pushed bullion prices to record highs above $2,100 an ounce, delivering an annual gain of 22%. That rally, incidentally, was on the back of inflation concerns as U.S. budget deficits began hitting records from record Covid-19 relief spending.

Gold has traditionally been touted as a hedge against inflation, although that argument was weakened earlier this year as the yellow metal’s prices steadily fell in the face of ramping price pressures in an U.S. economy rebounding aggressively from the coronavirus pandemic. Often, gold fell at the expense of the dollar and U.S. Treasuries, which rallied on expectations of rate hikes by the Federal Reserve to tamp down inflation.

“The gold-inflation divorce of 2021 will certainly be hurting to bulls in the space who’d have expected last year’s love theme between the two to continue,” said Phillip Streible, precious metals strategist at Chicago’s Blueline Futures. “Honestly though, the writing for that break-up was already on the wall with the sell-offs in gold that we had seen since Q3 last year, and deepened through 2021.”

“That said, it doesn’t mean that the gold-inflation play will not reassert itself in the coming year,” Streible added. “The Fed is unlikely to have as many rate hikes as it thinks in the coming year and if employment slows again for any reason, hedging in gold could again become a theme. And that’s one reason why gold has come back to finish 2021 above $1,800 from this year’s low beneath $1,700.”

The Fed has announced an expedited timetable for ending its pandemic-era stimulus and intends to raise interest rates by as early as March, the first time in two years since the Covid-19 outbreak of March 2020.

The Fed has said it could have as many as three rate hikes in 2022 but that will depend on keeping inflation at 2% a year and unemployment ideally at around the 4% level that it defines as “maximum employment”.

The U.S. jobless rate soared to a record high of 14.8% in April 2020 after the Covid-19 outbreak, but fell back to 4.2% last month. But the Consumer Price Index grew by 6.8% in the year to November, its most since 1982.

News of rate hikes are almost always bad for gold. But if the inflation theme remains strong, then gold could still reach new highs. That’s what bulls in the space are counting on.

Gold, Inflation Divorce Hands Bullion Bulls Biggest Annual Loss Since 2015
 

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Comments (7)
Stan Smith
Stan Smith Dec 31, 2021 3:43PM ET
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The fact that both gold and silver ended the year sharply lower than where they started even though inflation hit the highest level in 40 years, remains one of the great mysteries of 2021...
Barani Krishnan
Barani Krishnan Dec 31, 2021 3:43PM ET
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As great a mystery as any. But, of course, the JPM and Scotias of the world know better, eh? (wink, wink)
Roberta Garrett
Roberta Garrett Dec 31, 2021 3:43PM ET
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but is it a mystery? or have people finally come to grips with the understanding pm's have zero yield? holding cash isn't great either but with cash all you lost this yr was rate of inflation. even a 10yr bond pays better than zero with silver options I have lost well over 20%. no its not been a great yr for pms regardless of the commodity super cycle infomercials you see on TV etc. what will be the catalysts that bring back silver and gold prices? constructive comments plz
Barani Krishnan
Barani Krishnan Dec 31, 2021 3:43PM ET
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Roberta Garrett  For gold, you could say jewelry demand. But that's quite static as it is, even with the most bullish forecasts for Indian and Chinese buying. For silver,  you can say industrial demand if the US infrastructure expansion goes to plan. But really, inflation is the biggie here, as much as we speak about PMs operating in a vacuum without it.
Roberta Garrett
Roberta Garrett Dec 31, 2021 3:43PM ET
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thanks for answering. not sure i understand tho. so, inflation is the biggest catalyst for silver not industrial demand? Hard to understand when 51% of all silver is used in industry. its also difficult to see how we get economy moving and PMI up when so many people are out with natural disasters and omicron. Do you think inflation and FED QE easing is enough to drive up price of silver? Or will we have to have the social program passed too to get enough upward pressure for silver and other pm's to go higher?
Stan Smith
Stan Smith Dec 31, 2021 3:31PM ET
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When you see articles like this its time to start buying Gold. The Paper Ponzi scam is on its last legs and the last thing Wall St wants is investors holding real assets when it implodes. They need 'Paper' bag holders!
Barani Krishnan
Barani Krishnan Dec 31, 2021 3:31PM ET
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Stan, physical bullion and gold paper are themselves divorced, so yes! Happy New Year, mate ;)
Jack Drummond
Jack Drummond Dec 31, 2021 3:31PM ET
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Barani Krishnan , I'm confused. Earlier this year I wrote to you in a gripe about how physical gold is dragged down the the stock market turns markedly down- and those in the market get liquidity to cover losses by selling their paper gold cheap. I felt is was unfair that my investment values hinge upon the whim of unlucky traders. You explained then, that physical and paper gold are linked in arbitrage. Hence my confusion when tonight you call the two "divorced." If only I should be so lucky, (wisely, timely, investing in physical), that the two were operating in separate spheres. Am I just muddying the waters ?? Hope I hear from you on this. You have a happy and prosperous new year !!
Barani Krishnan
Barani Krishnan Dec 31, 2021 3:31PM ET
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Jack Drummond  Hello there. What I meant by "divorced" here is the sheer price action compared with the paper market. Indeed, the two are linked in arbitrage but the correlation doesn't fully justify the difference in pricing between actual gold bars and Comex-traded futures. Many others will tell you that, and will also add that physical supply of gold bars remain scarce. One point that highlights this is the difference between the spot losses in gold and Comex for this year. Spot lost 3.5% while the paper market fell 4.5%. Not a major difference but you can see the disparity. Hope that helps, and Happy New Year, mate!
James Vandervest
James Vandervest Dec 31, 2021 3:27PM ET
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Well, I'm up on all the physical gold I bought, my PaxGold is stabilizing and countering the losses in my Crypto account and my gold miner stocks are up today, countering an off day in my brokered stocks day. Seems like gold is the only thing shining today. RIP Betty While.
Barani Krishnan
Barani Krishnan Dec 31, 2021 3:27PM ET
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Good for you, yes. And what a loss, Betty White: the eternal "Golden Girl"
Raymond Pasillas
Raymond Pasillas Dec 31, 2021 3:26PM ET
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Gold is going to $5k ounce soon. To much money printing, raising debt ceiling and big government.
Barani Krishnan
Barani Krishnan Dec 31, 2021 3:26PM ET
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Let's get to $3k first, mate. You need the JPMs and Scotias of the world to agree.
Dave Jones
Dave Jones Dec 31, 2021 3:09PM ET
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Not one single physical ounce of gold will be sold at spot price. Even more so with silver. You might as well be talking about belly button lint....
Mitchel Pioneer
Mitchel Pioneer Dec 31, 2021 3:01PM ET
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The US Ponzi Scheme ends the year cementing it's position as the greatest financial fraud in history, and biggest investment JOKE in the world.  Assume the proper position for the New Year America.
Anthony Gemma
TRGfunds Dec 31, 2021 2:46PM ET
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1 ounce of gold today can buy a fine hand made suit, the same as it could hundreds of years ago. Now shut up with this propaganda. I hope they pay you well to lie like this, but I know they don't.
Show previous replies (6)
Barani Krishnan
Barani Krishnan Dec 31, 2021 2:46PM ET
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"Gold has traditionally been touted as a hedge against inflation, although that argument was weakened earlier this year as the yellow metal’s prices steadily fell in the face of ramping price pressures in an U.S. economy rebounding aggressively from the coronavirus pandemic. Often, gold fell at the expense of the dollar and U.S. Treasuries, which rallied on expectations of rate hikes by the Federal Reserve to tamp down inflation." (If you dispute anything in this paragraph, I'll beat you with my grandma's old broom!)
Barani Krishnan
Barani Krishnan Dec 31, 2021 2:46PM ET
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You have a problem with this, TRG? Gold bulls should be loving Streible for what he said!: "“The gold-inflation divorce of 2021 will certainly be hurting to bulls in the space who’d have expected last year’s love theme between the two to continue,” said Phillip Streible, precious metals strategist at Chicago’s Blueline Futures. “Honestly though, the writing for that break-up was already on the wall with the sell-offs in gold that we had seen since Q3 last year, and deepened through 2021.That said, it doesn’t mean that the gold-inflation play will not reassert itself in the coming year.The Fed is unlikely to have as many rate hikes as it thinks in the coming year and if employment slows again for any reason, hedging in gold could again become a theme. And that’s one reason why gold has come back to finish 2021 above $1,800 from this year’s low beneath $1,700.”
Barani Krishnan
Barani Krishnan Dec 31, 2021 2:46PM ET
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And last but not least, TRG: Let's not try and insult anyone for the job he does. Ok? Happy New Year.
Barani Krishnan
Barani Krishnan Dec 31, 2021 2:46PM ET
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Tom Sc  Thanks for having my back, and Happy New Year to you!
SunilKumar Dixit
SunilKumarDixit Dec 31, 2021 2:46PM ET
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TRGfunds...? Only those in ponzi scams will have problems with such articles which cover the markets with key issues and with absolute clarity. Trust me when I say my kid couldn't stop laughing at your comment that reads the article as propaganda. Nevertheless I can understand and thus I wish you a happy new year 😎
 
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