The latest Sprott Monthly Report prepared by Nasdaq revealed the top 10 developments that gold and precious metals investors should watch in 2022. We have prepared the headlines from the report and the explanations of market strategist Paul Wong who evaluated the report for Somanews readers.
M2 Money Supply, US 10-year Treasury real interest rates and US Dollars (USD)
Market strategist Paul Wong states that all these variables are driven by fiscal policy. US debt reached its highest levels since WWII, causing real interest rates to drop to their lowest levels ever. “US dollar price levels are more complex and affected by many more factors,” said Paul Wong, noting that one of the most important factors for the USD level to fall is that the higher USD tightens global financial conditions, which is undesirable for central banks. The strategist makes the following assessment:
The main factor driving the strength of the USD is the global demand for USD liquidity and funding due to the very high level of external debt in USD. Overall, we see that the long-term trend for the USD is lower, but with counter trend price movements.
Decreased monetary and fiscal impulses in general
Paul Wong predicts fiscal stimulus will decline as money supply growth and new credit expansion slow. Central banks have started the contraction process and rate hikes are just around the corner. The developed market believes central banks will begin to see shrinking balance sheets in the second half of 2022.
Higher macro risk levels
As liquidity resources decrease, sensitivity to macro risk will increase. Currently, Paul Wong thinks the risks are clearly increasing but are difficult to quantify and define. Supply chain issues and inflation issues pose a clear risk, but the strategist comments that “other unforeseen risk factors remain, another problematic variant of Covid, geopolitics, a global energy crisis, and developments in China.”
Despite initial messages pointing to a measured contraction, the Fed has become increasingly hawkish throughout 2021. The Joe Biden administration will view inflation as a major political responsibility, further inspiring the Fed’s hawkish moves. If inflation accelerates even as the Fed tightens, Paul Wong thinks the Fed is even less likely to intervene with pigeon action if a risk event occurs.
While waiting for Jerome Powell Pivot 2.0
Paul Wong believes that the removal of asset purchases (QE) (quantitative easing) and QT (quantitative tightening) will lead to price discovery on asset prices and risk.
It’s not hard to imagine that once the Fed, a huge price-insensitive buyer, not only walks away but starts selling, its ‘risk channels’ will become more active and efficient, and risk will be priced more sharply.
Although 2022 is only a month old, Paul Wong believes we are in the early stages of a rate shock. Bullion outperformed the US Treasury index by 46.7%, going back to 2016, and has a better Sharpe ratio, according to the strategist, who sees safe-haven allocations likely to increase.
Reflation flows back to safe-haven flows
At the end of 2020, the reflation trade was fueled by the widespread success of coronavirus vaccines. This, combined with a Democratic election sweep, provided high levels of fiscal stimulus and credit expansion. We’ve seen a return from gold to industrial metals. Paul Wong thinks this trend is reversing in 2022 as conditions for investors to return to safe-haven assets.
Non-investment gold buyers return
Chinese and Indian gold imports combine with central bank purchases to generate the bulk of non-investment demand for gold. Covid has caused consumer gold demand to plummet and economies to bounce. Rising investment demand for gold pushed prices to all-time highs. Paul Wong comments:
But consumer demand is likely to pick up as prices fall and economies reopen. Central bank purchases will increase as countries move away from the USD.
Gold bullion and gold stock positions and sentiment
Paul Wong points to the old trader’s adage that when sellers run out, prices drop:
With more gold trading resources over the years absorbed by stronger hands such as India, China, central banks and non-GLD bullion ETFs, we believe the available liquidity is likely less than the supply-demand data would indicate.
Also, the strategist expects a sharp rise in gold prices, which usually happens after a long period of consolidation.
Extremely undervalued gold stocks
Income from gold bullion and gold stocks has historically protected against inflation. They are currently trading at low valuations. Miners have been particularly profitable with their incredibly strong balance sheets.