As we started a new year, it's time to take stock of the precious metals complex and evaluate the future movements of gold prices in 2022 and beyond. During the year, there seemed to be a change in the way investors viewed gold as a store of value. Cryptocurrencies came of age and began to steal some of the safe-haven appeals that gold owned. Gold prices lost approximately 4% year-over-year. One of the culprits that undermined the value of the yellow metal was gains in the U.S. dollar. The greenback gained traction during 2021 as the dollar index increased by nearly 7%. Despite record inflation dating back several decades and volatile commodity trading, gold prices could not gain traction in the face of rising U.S. yields and a stronger greenback. The markets have priced in 75-basis points in rate hikes in 2022, based on the forecasts provided by the U.S. Federal Reserve. The outlook for gold will depend on how accurate the market's forecast of U.S. interest rates turns out.
U.S. Interest Rates Drive the Dollar and Gold
Gold prices have struggled to gain traction as the greenback has climbed. In November 2021, the Federal Reserve signaled to market participants that they would begin to unwind their bond purchase program. The tapering of this massive stimulus came as inflation started to accelerate to record rates. U.S. Consumer prices rose 6.8% year over year, the highest year-over-year increase since July 1982.
The upward momentum in U.S. rates was unmatched by European yields. German yields, used as a benchmark for European yields, underperformed their U.S. counterparts, allowing the yield differential to move in favor of the U.S. dollar. The 2-year yield differential between U.S. sovereign yields and German sovereign yields increased by 50-basis points in 2021, from 83-basis points to 137-basis points. This significant move in the yield differential was the impetus for the gains in the U.S. dollar versus the euro.
In December, at its final monetary policy meeting of 2021, the Federal Reserve released its average forecast for interest rates, growth, and inflation. The average Fed forecast for interest rates now sees rates rising three times in 2022 and three times in 2023, up to levels between 1.5% and 1.75% in 2023. The change in the level of short-term Fed funds has been priced into short-term treasury yields, which continue to trend upward. While most gains have already been priced into the market, this view will change as new economic data is released. The markets are also dealing with the onset of the new covid variant, which is helping to alter the view of where interest rates will move, as well as commodity trading.
Commodity trading of gold led to price declines in 2021 as the dollar gained traction. Prices traded in an extensive range, initially rallying to 1,959 and eventually falling to lows near 1,678. Throughout the year, lower highs and higher lows created a range that continues to become tighter. Resistance is seen near a downward sloping trend line that comes in near $1,860. Support is seen near an upward sloping trend line that comes in near $1,740. The December rally in gold prices has led to an overbought condition.
The fast stochastic is printing a reading near 99, well above the overbought trigger level of 80. Medium-term momentum is positive as the MACD (moving average convergence divergence) index recently generated a crossover buy signal. This situation occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses above the MACD signal line (the 9-day moving average of the MACD line).
Where Does Gold Go in 2022
The technicals show that prices are range-bound, while the fundamental backdrop points to lower gold prices. There will likely be additional commodity trading volatility. The fly in the ointment is COVID. The Omicron variant is spreading across the globe, which could generate a slowdown and potentially derail the Fed's plan to raise interest rates in 2022. If consumer spending begins to decline and sentiment in the United States drops, the markets will price in fewer rate highs, which will weigh on the greenback. Any drop in the U.S. dollar will be a welcome sign for the yellow metal. If COVID starts to fade from the front pages of the financial news, more robust U.S. economic gains could lead to a stronger U.S. dollar and lower gold prices. Despite record inflation rates, riskier assets have gained traction, reducing the need for gold as a safe-haven play. Additionally, accepting cryptocurrency and new Bitcoin ETFs has created a new value store other than the precious yellow metal.