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Category: Bullion Bulletin

Bullion Bulletin: Reasons to be cheerful

Back in 1979, the British punk front man, Ian Dury led his band, The Blockheads, in the 'shopping list' song Reasons To Be Cheerful. We all n...

20 January 2022

Gary Mead

Back in 1979, the British punk front man, Ian Dury led his band, The Blockheads, in the ‘shopping list’ song Reasons To Be Cheerful. We all need to find reasons to be cheerful, given that we have just lived through ‘Blue Monday’ – the third Monday in January – which is supposedly the most depressing day of the year. The lyrics list lots of things for which Dury felt we should all be grateful for – including the juice of a carrot.

But there’s no convincing evidence that Blue Monday is sadder than any other day of the year. The pseudoscientific assertion that it’s the most depressing day was the 2005 creation of a psychologist, who was employed by a British PR company and travel firm, who wanted to drum up business and so staged a PR stunt.

Blue Monday is a PR stunt but gold isn’t. Gold and gold holders have many reasons to be cheerful as we dive further into 2022.

First of all, we need to remind ourselves that gold prices have risen 20% since Christmas 2019, when Covid-19 started appearing in the headlines. The price peaked in August 2020 and since then has stayed close to that all-time high. Other assets had much bigger returns; but who, at the start of 2021, would have guessed that investing in coal (of all things) would have seen a return of more than 160%, or that lead would have returned more than 18%? Hindsight is a wonderful gift, which sadly, none of us has.

Across 2021 gold lost almost 4% in US Dollar terms (although was up more than 3% in Euros and more than 6% in Japanese Yen) but other precious metals did worse – in US Dollars, platinum ended the year down by almost 10%, silver by more than 11% and palladium by more than 22%. 2021 was a lean year for gold, following two preceding fat years; the price went up by more than 18% in 2019 and more than 25% in 2020.

This year, the US Federal Reserve will push up interest rates, by three or perhaps four times, prompted by inflation now running very hot, at an annualised 7%. How fast and furious will interest rates rise? Higher interest rates don’t sound like a reason to be cheerful – they will mean a stronger Dollar and that is likely in turn to mean a weaker gold price.

Yet the World Gold Council (WGC) says that “gold has historically underperformed in the months leading up to a Fed tightening cycle, only to significantly outperform in the months following the first rate hike”.

So far this has played out – an underperforming gold price in 2021, as we all expect a Fed tightening cycle. Will the second half of that WGC view also turn out to be correct, with a “significant” outperformance following the start of a tightening monetary policy? Reasons to be Cheerful, indeed!

 

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