December first week: Gold and aggressive Fed rhetoric

In November of this year, the precious metal exchange rate increased by 4.15%. By the end of the month, quotes were hovering around the 50- and 200-day moving averages. From the first days of winter, yellow metal prices began to rise smoothly after the news about a new strain of the coronavirus called "omicron," as well as a series of speeches by the head of the Fed. The increase in the cost of precious metal was also influenced by the ongoing increase in the inflation rate in the United States and other countries.

Jerome Powell, head of the Fed, said the U.S. labor market may be hit by the emergence of a new strain. Among the American population, fear of contracting the coronavirus may increase and some citizens simply will not go to work. Consequently, economic activity in the country will decrease. After such news, the price of gold made a minor breakthrough. It is not yet known for certain how dangerous the new strain is, and whether it is possible to protect against it with current vaccines. However, Stephan Bansela, CEO of the corporation "Modera," has already warned that the vaccines developed are likely to be less effective against the new strain. So investors were slow to buy dollars and bonds.

In the middle of the week, the precious metal rate reacted with a pullback to the increase in the dollar index, which received support from the aggressive rhetoric of the head of the Fed. Speaking to the Senate Banking Committee, Powell made it clear that the US Central Bank could accelerate the curtailment of the asset buyback program, which was launched in 2020 in response to the coronavirus pandemic. This decision is caused by an increase in the threat of maintaining a high inflation rate for a longer period. The asset buyback program could be completed months earlier than planned. The Fed will make a final decision on the issue at its next monetary policy meeting, which will be held December 14-15 and will be the last in 2021. Reducing incentive measures and raising interest rates, as a rule, raise the yield of government bonds, which leads to an increase in alternative costs when storing precious metals that do not bring interest income.

Fed chief changes attitude on inflation

In his testimony before the Senate, Powell did not use the terms "transient" and "temporary" regarding inflation. Recall that he himself put them into use a few months ago, when he justified his decision not to rush to curtail incentives and raise rates. The Fed chief has now acknowledged that the pace of inflation has accelerated and action needs to be taken to slow it down, most notably by raising interest rates in early 2022.

To market participants, Powell's recent comments came as a surprise. His "soft" stance changed sharply to "tough" just a week after his appointment for a second term. The Fed chief's shifting rhetoric is a signal to the market that inflation is the bank's focus. Therefore, the investment attractiveness of gold as a tool that protects against depreciation of money has decreased. While the dollar has declined in recent days, rising Treasury yields have weighed on gold quotes. The yield on the 10-year "treasurer" rose from 1.421% to 1.441%. Nevertheless, a crushing collapse in the price of gold did not happen - it remained above the $1,775 mark.

By the end of the week, the prices of precious metal increased amid increased public concern about the new coronavirus strain. An additional factor in the rise in the price of gold was statistics on the state of the labor market in the United States. The Bureau of Labor Statistics reported that 210 thousand jobs were created during November, which is significantly lower than the expected figure of 535 thousand people. Wages rose less than economists had predicted. This indicates that inflation may be higher than the officially stated figure. Now market participants are taking a wait-and-see position amid uncertainty about the omicron strain, and not very rosy news about employment in the United States.

Recall that in mid-November of this year, the price of gold in the European Union reached 1648 euros. Exactly a year ago, precious metal cost 1,469 euros. Thus, over 12 months, the gold exchange rate increased by 8% (in euros).

What will be December 2021 for the gold exchange rate?

Statistics on gold prices from 1970 to 2017 show that over this period, precious metal grew moderately in price with a small average monthly increase of 0.07%. During December, the gold rate fell 28 times. However, over the past 4 years, an upward trend has been observed.

In 2020, gold rose 4.4% in December when a new strain of coronavirus in the UK raised the degree of concern in financial markets. Then state borders around the world were closed, and quarantine measures were tightened. Now gold cannot rise in price amid the emergence of a new strain of coronavirus, since the danger of the latter has not been confirmed. If the risks associated with the emergence of the "omicron" increase, then the upward trend of gold will receive additional support. Cases of infection with the strain have already been identified in a number of countries, as a result of which governments are tightening restrictions on movement. The new strain could threaten the global economy with slower growth rates.

In December, gold will be able to compensate for some losses due to seasonal holidays in Asian countries. However, prices may remain in the current range as there is almost no sign that investors prefer to buy precious metal as a protective asset in an unstable epidemiological situation. For now, most traders and investors believe the new strain should not do much damage to the global economy.

What are analysts' forecasts for the 2022 gold exchange rate?

Bart Melek, head of commodity asset analytics at TD Securities (Canada), points to a number of important factors that can revive investor interest in gold. First, there is the slow economic recovery in the US and around the world. Second, the upcoming US midterm elections. Thirdly, the volume of gold purchases from central banks is consistently high. According to expert forecasts, yellow metal quotes could rise to the level of $1,900 in the first half of 2022.

Gerald Moser, an analyst at Barclays Bank (UK), believes that current fiscal and monetary policy creates favorable conditions for gold until at least 2023. According to him, precious metal quotes can grow by 10-20% if the situation with the global supply chain improves. The expert claims that gold will be in increased demand due to the growth of public debt. According to Moser, precious metal quotes will rise to $2160 and set a new historical maximum. Interest rates will remain low for a long time, possibly until 2023, which will create favorable conditions for further growth in yellow metal prices.