By Swann Collins, investor and consultant in international affairs – AssetsforWealth, February 6, 2022

Annual demand for gold (excluding over-the-counter markets) rose to 4,021 tons in 2021, recovering from losses in 2020 caused by the spread of COVID-19, reported the World Gold Council (WGC).

Demand for gold in the consumer-driven jewellery and technology sectors recovered throughout the year in line with economic growth and sentiment, while central bank buying also far outpaced that of 2020.

In the fourth quarter of 2021, gold demand rose to 1,147 tons, the highest level since the second quarter of 2019. This represents a demand increase of almost 50% year on year, according to the WGC survey.

Demand for gold bars and coins was 1,180 tons, up 31% to an 8-year high. Private investors have been looking for safe investments amid rising inflation and ongoing economic uncertainty as a result of the coronavirus crisis. Q4 2021 demand of 318t, meanwhile, was the highest for a fourth quarter since 2016. Bar and coin demand exceeded previous annual levels in both the US and Germany as investors focused on rising inflationary pressures and low/negative real rates.

In 2021, according to the World Gold Council, outflows from physical ETFs amounted to 173 tons. More tactical investors reduced hedging at the beginning of the year amid the start of the COVID-19 vaccination campaign, hoping for economic recovery and lower inflation. At the same time, the perspective of central banks raising key interest rates have pressured the growth of gold prices.

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In terms of annual consumer demand, jewellery recovered and returned to pre-pandemic levels of 2,124 tons. This was supported by a strong fourth quarter, in which demand reached its highest level since the second quarter of 2013, a time when the price of gold was 25% below the average price. This once again confirms the high gold demand in the last quarter of 2021.

Since 2010, central banks have been net buyers of gold for their reserves. They increased their gold reserves by 463 tons, which is 82% more than in 2020. A number of central banks from developing and developed countries replenished their gold reserves, providing a 30-year maximum of world reserves.

Gold used in the technology sector grew 9% in 2021, hitting a 3-year high at 330t. Y-o-y growth slowed in the most recent quarter (to 2%), highlighting the rapid recovery seen in the sector in Q4 2020. While demand in the technology sector is comparatively lower than in other industries, the use of gold is widespread and is used in various electronic devices – from mobile devices to the sophisticated James Webb telescope recently launched into Earth orbit.

In 2022, the price of gold is likely to face the same dynamics in 2021. In the short term, the value of the yellow metal will react to real interest rates, which in turn will depend on how quickly central banks around the world tighten monetary policy and how effectively they manage high inflation. Even if the U.S. Fed rise key interest rates, the high public debt will continue pressuring the value of dollar. If major economies like China and Russia continue in 2022 to sell their dollar reserves and to develop their trade ties with national currencies, the capacity of the U.S. dollar to cope with heavy public debt and quantitative easing will be reduced. The purchasing power of the U.S. dollar would decrease and investors will buy gold to protect their wealth.

From December 2020 to December 2021, U.S. consumer prices for all items rose 7.0 percent, the largest December to December percent change since 1981. Over the year, food prices increased 6.3 percent, a larger percentage increase than the 12-month increase of 3.9 percent in 2020. Food at home prices increased 6.5 percent in 2021, the largest over-the-year increase since 2008.

In the euro zone, the rate of annual inflation hit record 5.1% in January 2022, after 5% in December, 4.9% in November, 4.1% in October, 3.4% in September and 3.0% in August, according to a flash estimate issued by Eurostat, the statistical office of the European Union. Many hoped that annual inflation would ease in January. They were wrong.

The high inflation seen in 2021 and the possibility of a stock market downturn in 2022 are likely to support demand for gold as a defensive asset. In addition, gold should continue to receive support from consumer demand and central banks around the world. How will central bank manage high inflation will be a key driver for gold institutional and private demand in 2022. Gold prices could reach $ 2,000 per troy ounce in 2022.

The reasons for this growth of gold prices in 2022 will be a slower than expected economic growth in the U.S. and Europe, a high inflation and more generally, the anxiety resuling from the Covid-19 health crisis and its political consequences. Political instability in developed countries could make investors running for gold, at least for some months. The current movement of thousands of Canadian truck-drivers blocking Ottawa, the federal capital of Canada, asking for removal of Covid-19 restrictions, vaccine mandates and lockdowns, enters its 8th day. This protest could generate political instability and worry investors. In addition, the Asian demand for gold could also boost the prices for the yellox metal, as China and India are traditionnally strong markets for investment gold and gold jewellery.

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© Copyright 2022 – Swann Collins, investor and consultant in international affairs.