The latest Sprott Monthly Report covers the top 10 things that gold and precious metals investors should watch for in 2022.
- M2 Money Supply, U.S. 10-Year Treasury Real Yields, and U.S. Dollar (USD) – Market strategist Paul Wong notes that all of these variables are driven by fiscal policy. U.S. debt has hit its highest levels since World War II, causing real yields to fall to their lowest levels ever. Wong says, “U.S. dollar price levels are more complicated and are affected by many more factors. One of the most significant factors for a lower USD level is that a high USD will tighten global financial conditions, which is undesirable to central banks. The main factor for USD strength is the global demand for USD liquidity and funding due to the very high level of foreign USD-denominated debt. Overall we see the long-term secular trend for the USD as lower but with counter-trend price moves.”
- Across-the-Board Declining Monetary and Fiscal Impulses – Wong sees fiscal stimuluses declining as money supply growth and new credit expansion slows. Central banks have started the taper process, and rate hikes are just around the corner. He believes that developed market central banks will start to see shrinking balance sheets in the second half of 2022.
- Higher Macro Risk Levels – As liquidity sources fade, susceptibility to macro risk will rise. Currently, Wong sees risks as clearly growing but hard to quantify and identify. Supply chain woes and inflation troubles present clear risk, but Wong notes, “other unpredictable risk factors remain another troublesome COVID variant, geopolitics, a global energy crunch and developments in China.”
- A Hawkish Fed – Despite initial messaging that indicated a measured tapering process, the Fed grew more and more hawkish throughout 2021. The Biden administration will view inflation as a huge political liability, further inspiring hawkish moves from the Fed. If inflation accelerates even as the Fed tightens, Wong sees an even lower likelihood that the Fed will intervene with dovish action if a risk event were to occur.
- Waiting for the Powell Pivot 2.0 – Wong says, “We believe the removal of asset purchases (QE) and QT are likely to lead to price discovery on asset prices and risk. When the Fed, a massive price-insensitive buyer, not only steps away but starts to sell, it is not hard to imagine that the ‘risk channels’ will become more active and efficient, and risk will be priced more acutely.”
- Portfolio Risk – Even though 2022 is barely a month old, Wong believes that we are in the early stages of a rate shock. Safe haven allocations are likely to increase. Bullion has outperformed the U.S. Treasury index by 46.7% going back to 2016, and has a better Sharpe ratio.
- Reflation Flows Back to Haven Flows – At the end of 2020, reflation trade was sparked by the widespread success of coronavirus vaccines. This, combined with a Democratic election sweep, ushered in high levels of fiscal stimulus and credit expansion. We saw a rotation away from gold and into industrial metals. In 2022, Wong sees this trend reversing as conditions prime investors to rotate back into safe haven assets.
- Non-Investment Gold Buyers Returning – China and India gold imports combine with central bank purchases to make up the bulk of non-investment demand for gold. COVID caused consumer gold demand to plummet and economies to sputter. Investment demand for gold increased, driving up prices to all-time highs. But since prices have come down and economies have reopened, consumer demand is likely to recover. Central bank purchases will also increase as countries diversify away from USD.
- Positioning and Sentiment for Gold Bullion and Gold Equities – Wong notes the old traders’ adage that price lows happen when sellers are exhausted. “With more trading sources of gold over the years likely absorbed by firmer hands such as India, China, central banks and no-GLD-bullion ETFs, we believe the available liquidity is probably less than what the supply-demand data would indicate.” He also anticipates a sharp rise in gold prices, which typically happens after a long period of consolidation.
- Gold Equities at Extreme Low Valuation – Gold bullion and revenue from gold equities hedges against inflation, historically. They are currently trading at low valuations. Miners have been particularly profitable, with incredibly strong balance sheets.
Investors can get exposure to physical gold through the Sprott Physical Gold Trust (PHYS). Investors seeking to take advantage of those the value in gold equities exposure can look at the Sprott Gold Miners ETF (SGDM) and the Sprott Junior Gold Miners ETF (SGDJ).
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