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After the COVID-19 crash of 2020, demand for gold soared until it reached an all-time high of $2,074 in August of that year. 2021 saw interest in the precious metal decline but never disappear completely. As we look to 2022, the world is still in turmoil, financial markets feature several speculative bubbles, and it seems safe to assume gold should be a theme to watch in the year ahead.
Safe haven assets gain ground when something worrying occurs, like the threat of war or a vaccine-resistant COVID-19 variant. As geopolitical tensions and COVID scares have been reoccurring in recent months, precious metal prices have seen volatility.
In times of geopolitical unrest and instability in the financial markets, gold has long been considered a safe haven investment. And its less valuable counterpart, silver is sometimes seen in this way too.
To invest in gold or silver, investors can buy the physical metal in the form of bullion or coins, buy gold and silver ETFs, or invest in mining stocks.
From bull to bust
The US stock market has been enjoying an unprecedented 11-year bull run since the recovery from the great financial crash began in March 2009. Other than a couple of intermittent wobbles, most notably the COVID-19 crash in March 2020, the S&P 500 has scaled above 4,700 points.
For the most part, this led gold to fall out of favor, as faith in the stock market rallied on. But how much longer this will last is questionable, and as a result, gold is once more shining bright in the eyes of investors.
Meanwhile, interest in silver is more volatile. Silver price recovery after the COVID crash was remarkable, and it remains elevated 20% to 30% above its pre-COVID price level. But it doesn’t have quite the same appeal as gold because it’s not as valuable.
Nevertheless, interest in silver has been rising thanks to its usefulness in manufacturing semiconductors and tech. The global transition to electrification is ramping up, and silver is once more being discussed as an investment proposition.
Gold’s most recent peak was over a year ago, in August 2020. Meanwhile, silver enjoyed a meme-inspired rally in February 2021 as retail investors caught wind of its importance in tech.
As signs of numerous bubbles have been emerging in asset classes, investors are back to hedging their bets. This gives gold and silver clout as trending themes to watch in 2022.
Is inflation good for precious metals?
In recent months inflation concerns have been mounting. Consumers are experiencing higher grocery bills while soaring energy prices are pushing up the cost of goods and services everywhere. Traditionally this would have investors turning to gold, but nothing is straightforward in the world of investing.
Interest rates have never been this low for this long, and global debt has never been so high. Plus, the rise of cryptocurrencies such as Bitcoin, Ethereum and various tokens give investors an alternative option for their cash.
If inflation leads to higher interest rates, this won’t necessarily boost the gold and silver investment thesis. That’s because when investors earn higher interest rates these returns are an improvement on gold and silver, which don’t earn interest.
Nevertheless, inflation erodes the buying power of paper currencies, and this is where precious metals come into their own. Gold is scarce, so it can’t be devalued in the way that fiat money can.
Gold-Silver price ratio
Gold is currently worth around 74 times more than silver, meaning you could buy 74 ounces of silver for the same price as one ounce of gold. The closest they’ve been in price is when silver hit a record $46 an ounce in 2011, at which point gold was worth 30 times more than silver.
The gold-silver ratio refers to the number of ounces of silver needed to buy one ounce of gold. For those investors that believe in reversion to the mean, silver is either undervalued, or gold is overvalued. But that’s only a consideration if both metals are considered a hedge against inflation, financial uncertainty, and geopolitical unrest.
Historically, gold performs well in a macro environment of higher interest rates and risk-on investor appetite. As global debt has never been so high, a return to higher interest rates is expected. The Fed has already hinted this is likely to begin in 2022.
Meanwhile, silver is sometimes called ‘the restless metal’ as its price action is so volatile. But it has inherent value in that it is a finite tangible asset. Therefore, the price of silver is unlikely to ever go to zero, so investors often buy in to take advantage of the next rally higher when its price declines.
How governments and countries value gold
Gold has been a desirable high-value commodity throughout history, and a large part of government asset allocation has traditionally been in gold. As of September 2021, the United States was the leading gold holding country worldwide, with gold reserves amounting to 8,133.5 metric tons. Germany came in second place and China sixth.
Half of the global gold consumption is in jewelry, 40% in investments (25% in central bank reserves, 15% held by individuals), and 10% in industry.
Meanwhile, China, Australia, the United States, South Africa, Russia, Peru, and Indonesia are the world's biggest gold producers. While the world’s biggest gold jewelry consumers are India, China, the United States, Turkey, Saudi Arabia, Russia and UAE.
An interesting point about the gold jewelry market is that old gold jewelry is often recycled. And this recycled gold comes back into circulation to meet increased demand. As gold prices rise, this recycling practice often increases. For instance, between 2003 and 2010, the supply of gold from recycled jewelry doubled.
Investor appetite for gold fluctuates according to the gold price and near-term outlook. In autumn 2021, global gold ETF holdings fell. But interest in physical gold appeared to strengthen.
Buying physical gold & silver
Sometimes consumers like to own physical gold because it is something tangible they can see and hold. It gives the reassurance of wealth in an increasingly digital world.
Gold’s diversification benefits, combined with offering downside protection, make it attractive to investors looking to hedge.
Gold and silver coins and bullion can be bought from “authorized purchasers” of United States Mint bullion coins. In the UK, bullion coins and bullion bars are available to purchase directly from The Royal Mint in London. It can also be bought from auction houses, eBay, and jewelry stores.
Buy digital gold
Digital gold or e-gold is another way to invest in gold, silver and other precious metals such as platinum. Many brokers offer a facility to invest in fractional quantities of gold and silver. This is often backed with a security promise from banks and intermediaries. It is also preferable for investors looking to guard against theft and lack of market liquidity.
Investing in gold and silver ETFs
In recent years, exchange-traded funds (ETFs) have soared in popularity and offer investors a hands-off way to invest in themes or assets of their choosing.
The first real gold ETF to ever launch was the popular SPDR Gold Trust (GLD), which recently celebrated 17 years in existence. According to ETF Database, it remains the number one gold ETF on the market by assets under management.
A more recent addition to the gold ETF pool is The USCF Gold Strategy Plus Income ETF. This is an ETF that owns gold and offers investors a dividend yield. But this writes call options against the gold in order to make the dividend payouts. Therefore, it’s slightly riskier than a pure-play gold ETF.
The GraniteShares Gold Trust (BAR) is the fifth-largest gold ETF on the market by assets under management.
In the list of all Gold ETFs traded in the USA and tagged by the ETF Database there are currently 20 ETFs for retail investors to choose from.
Meanwhile, investors can also opt for silver ETFs. There are five Silver ETFs traded in the USA currently tagged by the ETF Database. Of these, the top three are iShares Silver Trust (SLV), Aberdeen Standard Physical Silver Shares ETF (SIVR), ProShares Ultra Silver (AGQ).
Investing in gold and silver mining stocks
Gold mining companies vary in size and quality of gold being produced. Many are uneconomical unless the price of gold is above a certain level. Therefore, high gold prices will lead otherwise unprofitable mines into production. Meanwhile, low-cost producers make even more profits, and production expands. But the alternative is when gold prices are low, uneconomical producers have to shut down and supply decreases.
One train of thought is that inflation increases production costs, making mining expensive, but the rising commodity prices offset the losses. Many studies back up this relationship between inflation and the rising price of gold.
For equity investors looking at portfolio diversification, gold and silver miners are sometimes an obvious option. They are prone to volatility, however.
Gold and Silver stocks to watch
Barrick Gold (NYSE: GOLD)
Newmont Corportation (NYSE: NEM)
Gold Fields Limited (NYSE:GFI)
Royal Gold, Inc. (NASDAQ:RGLD)
Rio Tinto Group (NYSE:RIO)
First Majestic Silver (NYSE: AG)
Pan American Silver (NASDAQ: PAAS)
The outlook for gold in 2022
As a country’s wealth and economic growth improve, demand for gold rises. That’s because more money is being spent on jewelry, technology and investments.
Likewise, in periods of uncertainty where market risk is worrisome, gold is used to hedge against currency depreciation, high inflation, and other systemic risks.
In 2022, gold is likely to gain value if inflation and a weaker dollar prevail. Central banks have begun to raise rates and taper asset purchases. This is bullish for gold.
Furthermore, in a world focused on combating climate change, it seems gold may be a safe asset to own. A report commissioned by the World Gold Council in collaboration with climate risk consultancy Urgentem has found that holding gold can align an investor’s portfolio with climate targets and a Net Zero scenario. The benefits include reducing the carbon footprint of a mixed portfolio (of equities and corporate bonds) and reducing portfolio vulnerability to climate transition risks such as carbon taxes.
Some analysts predict gold will experience at least one bullish cycle in 2022 with a target gold price of $2,500. That’s based on the premise that a gold and silver bull run began in 2019 and is set to accelerate in 2022.
Meanwhile, the price of silver is less predictable. Still, several analysts see it following the gold trajectory, and with demand for batteries and tech set to continue, demand for silver may well rise too.
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