The new year will be full of uncertainty as the Federal Reserve tries to rotate and tighten its monetary policies. At the same time, the threat of inflation continues to grow, meaning real interest rates will remain low and in negative territory. Gold price starts the last trading week of 2021 above $1,800 and the precious metal could see more bullish momentum in the new year, according to an analyst from Credit Suisse.
Analyst optimistic about short-term gold price
Precious metals analyst Fahad Tariq says in a recent report that he remains optimistic about gold prices even as the Federal Reserve prepares to raise interest rates in 2022. However, the bank does not expect gold prices to remain above pre-pandemic levels in the long run.
According to Fahad Tariq, Credit Suisse wants gold prices to average around $1,850. In the 2023 projection, the bank expects gold prices to drop to $1,600 and predicts long-term prices to be around $1,400. The analyst states that the most important impact for gold continues to be increasing inflation pressures and increases in Federal Reserve interest rates:
The consensus on interest rates appears to be potentially multiple rate hikes by the Fed in 2022 (following the completion of the tapering program). But given the record high national debt, there is uncertainty about how high rates might actually be.
While the Federal Reserve says it expects to raise interest rates at least three times next year, Fahad Tariq says rising inflation pressures will keep real rates in negative territory until 2022. Therefore, he emphasizes that negative real interest rates will continue to be supportive for the gold price:
In our opinion, the risks include; There is a more hawkish Fed, a return to normalized inflation, a substitution effect with cryptocurrencies, and continued weakness in individual gold demand.
“Some challenges await the gold stock industry in 2022”
The analyst notes that mining stocks remain an attractive investment even if the price of gold remains stable around $1,850:
The gold industry remains fundamentally sound with strong balance sheets, although the price of gold has dropped from a record nearly $2,000 in August 2020 to about $1,770 (-11.5%).
However, Fahad Tariq says the gold stock industry may also face some challenges in 2022, as input prices are rising due to inflation:
Since mid-2021, investors have been watching more closely for cost inflation for gold miners. Moving forward into 2022, potentially stable or declining gold prices, combined with margins and free cash flow, raise concerns that operating cost inflation of 5-10% could be much lower.
The analyst adds that they do not expect Covid-19 to be a major operational concern in 2022, except for a new variant of Covid-19 causing widespread cases and a return to quarantines. Credit Suisse says its top pick in the mining industry is Agnico Eagle, which is the world’s third-largest gold producer after combined with Lake Kirkland.
We see Agnico Eagle as the highest quality, lowest cost senior gold producer post-deal, and there is room for a significantly higher dividend.