Why did gold change last year's decline and effectively hedge the upward pressure of inflation this year?Since the Fed's January FOMC meeting, the overall performance of various types of assets has been in line with what we had expected in the previous report, showing a ranking of commodities > equities > dollars > Treasuries.

From the perspective of shortening the period, gold prices have seen a strong rise since the Spring Festival on February 1, breaking the $1900 / oz mark again eight months later, and there was also a good trend before the Ukraine problem was fermented on February 11. the market reacted strongly to the inflation problem, and the gold price trend has already deviated from the real yield trend of US Treasuries.

This can not help but ask why gold failed to perform well in 2021 when inflation continued to exceed expectations, but gold prices fell 3.3% for the whole year.

We believe that this is mainly due to the expectation of interest rate hikes and changes in economic fundamentals, as well as the pulse rise in gold prices in the face of the recent sharp increase in geopolitical risks, gold prices may usher in a rising gold cycle this year, and we expect Comex gold prices to break through the $2000 / oz mark this year.

A number of tailwind factors are superimposed, and gold prices are expected to be well supported this year.

First, the weakening of economic growth expectations and rising inflationary pressures will be the main supporting factor for gold prices this year.

Looking back at the trend of gold last year, although global inflationary pressures have been accumulating under the supply crisis, gold prices have not improved since the second half of 2021. It shows that in the stage of economic stabilization, the impact of inflationary pressure brought about by a sharp rebound in demand on gold prices is not obvious.

However, recently, IMF, WB and other international organizations have successively downgraded their economic growth forecasts, 10Y-3M spreads have widened, and the probability of recession in the United States in 2022 has increased; the faster-than-expected year-on-year growth rate of CPI in January has boosted market concerns about inflation. Under the combined effect of these two factors, the anti-inflation and anti-risk ability of gold can be reflected, which we expect to be the primary factor affecting the strength of gold prices in 2022.

Second, during the interest rate hike cycle, the negative correlation between gold prices and US real interest rates tends to fail.

In a previous report ("Why are commodities not afraid of previous Fed rate hikes?" "2022-2-2) We have combed the commodity performance in all interest rate hikes since 1990, and gold has performed well among many assets, with an annualized yield of close to 10 per cent.

Although there is a strong correlation between the gold price and the real yield of US bonds, judging from the previous cycles of raising interest rates in the United States, especially the performance of gold prices during the period when the Federal Reserve raised interest rates more frequently this year, the market tends to pay more attention to the impact of interest rate increases on economic growth. under such concerns, the safe-haven nature of gold will be highlighted.

At a time when the Fed is forced to speed up the tightening process because of rising inflation, especially at a time when a single interest rate hike is likely to reach 50bp, this hawkish policy deployment reinforces fears that the economy may fall into recession, so we believe that the impact of US real interest rates on gold will be weaker than in the previous period.

Third, the differences in economic growth rates between DM and EM countries are intensified, the trend of the US dollar is weak, and the hedging effect of gold is enhanced.

Reviewing the two interest rate hike cycles since 2000, we find that the gold price rise in the 2004-2006 interest rate hike cycle is significantly stronger than that in 2017-2018, while the trend of the dollar index in 2004-2006 is significantly weaker than that in 2017-2018. To investigate the reason, we believe that the difference in economic growth between developed countries and emerging market countries led by the United States is one of the main reasons for this phenomenon.

Looking back to the period from 2004 to 2006, the difference in economic growth between the two types of countries widened sharply to nearly 5%, the recession probability estimated by the New York Federal Reserve rose sharply, while China's economic growth momentum was good. The annualized returns on the dollar index in 2004-2006 and 2017-2018 were-2.4 per cent and-0.7 per cent, respectively, while those on gold were 25.2 per cent and 6.0 per cent respectively.

According to the global economic growth forecast of IMF in January 2022, the gap in economic growth rate between DM and EM countries in 2022 is wider than the previous forecast, and the difference in economic growth rate of EM-US has widened from-0.4% to 2.1%. Under the disturbance of this factor, we expect that it is difficult for the dollar index to perform well, which will support the gold price.

Finally, under the geopolitical crisis, the risk aversion attribute of gold is amplified, which will have a pulse effect on the price of gold.

Recently, the issue of Ukraine has become the focus of the market, and occasional events will have a pulsating effect on gold prices. In addition, the US mid-term elections, Iran nuclear deal and other political factors will also support the gold price. The 2022 US mid-term elections will be held on November 8, when voters will vote for all seats in the House of Representatives and 34 seats in the Senate.

Taking into account the recent Biden poll approval rating hit a new low, the Republican Party is increasingly likely to sweep the mid-term elections, the next two years of US political uncertainty will continue to have an impact on gold prices.

Risk Tips:The spread of the epidemic exceeded expectations, and domestic and foreign policies exceeded expectations.