Soapbox: Farewell 2022

Will anyone look back on 2022 with fondness?

The past 12 months have seen inflation get its teeth into many countries, from Argentina’s annualized 90% to almost 270% in Zimbabwe. Those of us living in the US, the Eurozone or the UK should think ourselves lucky we are only battling 7.1%, 10.1%, or 10.7% respectively. Hurrah! My cash is ‘only’ going to be worth 10% less next year – it might have been wiped out altogether!

Central bankers last year were wedded to inflation being ‘transitory’ even though it was obvious that flooding their economies with cash during COVID would inevitably lead to inflation. This year, they have belatedly started to push up interest rates, to try to drain as much of this extra cash out of the economy as possible – which has led to higher mortgage costs for people everywhere and is producing further distortions in the market.

2022 didn’t start well and proceeded to get worse. Russia attacked neighbouring Ukraine on 24 February but its hopes of quick victory were thwarted. In Ukraine, inflation is now 26.5% and the International Monetary Fund (IMF) expects the country’s economy to shrink by around a third this year. It has been a human disaster and economic catastrophe not just for Russia and Ukraine but for the world. This war, which shows no sign of ending, pushed up international prices for grains, gas and crude oil and has provided central bankers with a handy prop to divert our attention from their vast Quantitative Easing post 2008 and the immense volume of monetary stimulus during COVID – ‘it’s all the fault of Russia’s invasion of Ukraine’ has become the inflation-mantra, which of course isn’t correct. As the year limps out we have more COVID worries. China’s removal of its zero-COVID policy might next year result in an explosion of cases and, sadly, deaths. If the first casualty of war is truth, then the worst wounds are inflicted on trust.

Edelman Trust Barometer 2022

In January this year, we quoted the 19th century philosopher Friedrich Nietzsche who once said: “I’m not upset that you lied to me, I’m upset that from now on I can’t believe you”. Distrust in governments, in media, in money, in the future, has grown this year. Not a gift that anyone longs for.

Year of the Dollar

2022 has been the Dollar’s year.

The Dollar price of gold ended January around $1,798/ounce. It started climbing once more in February and towards the end of that month was above $1,906, before reaching the year’s peak of more than $2,043 on 7 March. People turned to gold as a defensive asset as we headed into the unknown – would Russia deploy nuclear weapons in Ukraine? The gold price calmed somewhat by the end of March, to just above $1,925/ounce.

As indications that inflation in the US was getting a grip and that the Federal Reserve would be forced reluctantly to raise interest rates, by the end of April the gold price shifted lower, to around$1,897/ounce. This coincided with increasingly hawkish comments by the Fed and the start of its rate rise policy – the Fed had held the federal funds rate at around zero in the first quarter of 2022 and was buying billions of Dollars of bonds every month, all despite 40-year highs of inflation. On 17 March, it raised the fed funds rate by 0.25% and signalled that more was to come. It was the start of a tremendous bull run for the US Dollar; investors everywhere sniffed that Jerome Powell, chairman of the Federal Reserve, had pivoted from regarding inflation as a passing problem to seeing it as a threat. From around zero at the start of this year interest rates in the US are now 4.25%-4.50%; the Dollar strengthened, and reached a 20-year peak against other major currencies, to the detriment of the Dollar gold price. Overall in 2022 the Dollar price of gold by the start of December had fallen by more than 3% – but had risen by more than 8% against the Pound Sterling, by almost 6% against the Euro, and by more than 16% against the Japanese Yen.

Cryptocurrencies have also suffered from the decision of the Fed to tighten monetary policy; first the stablecoin (pegged to the Dollar) Luna collapsed in May, scams and fraud continued to plague crypto (investors lost $3.5 billion this year according to one source ) and the bankruptcy of the FTX exchange soured many investors; Bitcoin has dropped by more than 60% this year. The Dollar became the “king of the castle” said one commentator.

What does ‘normal’ look like?

As this year has proceeded it’s become clearer that a return to a pre-Covid world isn’t going to happen – too many previous certainties have been smashed. We have a war raging; inflation is easing but only very slowly and it’s now being openly talked of that the previous 2% annual ‘target’ of many developed country central banks might be loosened to 4%, say; the US remains a deeply divided country; China’s intentions are as difficult as ever to comprehend; people are reluctant to return to a conventional working pattern; it’s uncertain that Europe’s unity on sanctions against Russia can last through the winter; in the UK, strikes are hitting daily life across many sectors; emerging market countries are struggling with massive overseas debts; defending Ukraine against Russia will cost (unfunded) trillions, adding to debt piles that rival Everest… the list goes on – no wonder the word ‘polycrisis’ has been dusted down. One of the Covid pandemic’s buzz phrases was ‘the new normal’ – currently life is very abnormal.

2022 has been a year of disorder, of expectations up-ended; 2023 doesn’t look much more promising. If we consider economics alone, perhaps the best can that can said is that advanced economies borrowing in their own currency can use this unexpected inflation to reduce the real value of some nominal long-term fixed-rate debt.

Yet as the economist Nouriel Roubini says, “you cannot fool all of the people all of the time. Once the inflation genie gets out of the bottle – which is what will happen when central banks abandon the fight in the face of the looming economic and financial crash – nominal and real borrowing costs will surge. The mother of all stagflationary debt crises can be postponed, not avoided”. One can only hope that Roubini – and I – are wrong, and that Powell and his fellow central bankers can conjure a unicorn from the gloom – i.e. bring about a ‘soft landing’ and don’t create stagflation next year.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.