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How will interest rate hikes affect gold prices in 2022?

By Indrabati Lahiri

17:00, 14 January 2022

Image of gold bars
How are interest rate hikes likely to affect gold prices in 2022? – Credit: Shutterstock

Gold had a fairly turbulent year in 2021, with the worst crash in six years. This happened despite a rise in inflation, which should ideally have made gold more attractive to investors as a traditional inflation hedge. However, aside from a few rises here and there, the metal did not perform as expected.

Recently, the US Federal Reserve has indicated in the minutes of its December meeting that it is likely to raise interest rates in the near future to curb soaring inflation. Inflation has hit multi-year highs in the US and the Eurozone, on the back of numerous stimulus measures being implemented during the pandemic.

This has necessitated a decisive move on the part of central banks now. The Bank of England was the first to tighten monetary policy, with the US Fed following swiftly, as US inflation reached a three-decade high recently. Speculation for the US Fed implementing at least three, if not four, rate hikes this year are being made.

Rate hikes on horizon

With interest rate hikes soon on the horizon, investors have been speculating about the impact they will have on gold prices this year, considering gold’s recent performance, The metal hit a record high in August 2020, at $2,000 an ounce, but has struggled to recover its gains ever since, despite inflation rising steadily.

Historically, when interest rates rise, gold prices have fallen, as investors look towards other asset classes which offer higher returns such as bonds or equities. Whether this continues to be the case for gold this year as well remains to be seen as the exact timeline for the Fed’s interest rate hikes is as yet unknown.

However, the sentiment for the precious is, for the moment at least, quite positive, as prices continue to rise, hitting a one-week high recently.

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Gold showing resilience

According to Craig Erlam, Senior Market Analyst at OANDA, “Ordinarily higher interest rates should put downward pressure on gold prices, which makes the recent activity in the yellow metal all the more interesting. It’s seeing strong support despite tightening not only being priced in but at a rate not seen since the financial crisis. While I still believe the fundamentals will prove too big a barrier for gold this year and prices will retreat, it’s impossible to ignore the current price action and it may continue to show strong resilience for some time.

Although the mid- to long-term sentiment seems mostly bearish, as evidenced by the above comment, the short-term outlook seems mostly positive, as investors are still hopeful that gold may reclaim some of the ground it lost over the last year.

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DailyFX Strategist Nicholas Cawley believes that “gold is pushing back towards noted resistance between $1,830/oz. and $1,836/oz”. While the metal has faced significance resistance in this range in the last year as well, investors still maintain hope that this is the year that it finally breaks past this traditional barrier. If this occurs, it is likely that the metal will hit last November’s high of $1,877/oz as well, which may pave the way for further gains, at least until interest rates tighten further.

Weakness in the dollar

Cage goes on to elaborate that “The precious metal is benefitting from a bout of weakness in the US dollar as traders unwind their aggressive bets on the greenback.” With the pound sterling steadily gaining against the dollar for the last few days, this trend may continue for the near future as well.

In a report published on the company’s website, Carlo Alberto de Casa, market analyst at Kinesis Money believes that “Despite the markets’ expectation that interest rates will rise significantly in the next few months, investors are showing a significant interest in gold”.

He also believes that if gold can only cross the resistance area of around $1,830 to $1,832, this year may see more recoveries, whereas a fall to about $1,800 may signal further distress.

On the other hand, the rise of Bitcoin and other digital assets, such as NFTs, may also join forces with interest rates and contribute to the decline of gold prices this year, as more investors are turning towards them as inflation hedges. This is a trend that is largely likely to keep growing this year as more cryptocurrency-linked ETFs make their way on the market and investors have more choice in how and in what form they would like to invest.

However, there are also other dynamics, such as supply chain factors, demand and the progression of the pandemic that need to be considered while factoring in interest rate hikes into gold prices this year.

Read more: Gold price forecast for 2022 and beyond: A buy, hold or sell?

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