Surging inflation

The Fed’s failure to cope with soaring inflation could be the main driver of oil prices. At the end of 2021, Fed Chair Jerome Powell admitted inflation risks, though calling them short-lived. The European Central Bank may also follow the steps of the US regulator in the near future. Earlier, ECB President Christine Lagarde supported the same idea, emphasizing a transient nature of inflation. However, the situation has changed. In the short and middle term, inflationary pressure is likely to remain intact. This, in turn, may fuel demand for safe-haven assets, including gold. At the moment, we are witnessing several fundamental changes, primarily economic and political ones. Against this backdrop, gold may gain in value thanks to rising interest among investors.

Current monetary policy of central banks

Central banks are striving to tighten their monetary policies amid surging inflation and significant debt obligations. Notably, high debt levels were recorded in debt securities, some companies, and private households. At the end of 2020 – at the beginning of 2021, US national debt jumped by 19% (to 99% of GDP), showing the fastest rise. Meanwhile, debts of individuals and firms advanced by 14% to 178% of GDP. Against this background, monetary policy tightening seems reasonable. Such a scenario is likely to push gold prices higher.

Real interest rates

Investors, who bet against gold, hope that global regulators will keep monetary policies intact. However, most of such investors have already changed their mind since central banks are ready to take radical measures. Market participants understand that changes are inevitable and are pricing in monetary policy tightening. Higher interest rates may lead to a decline in the market and cool economies. If the predictions come true, the yield will become negative, whereas gold prices will grow.

Potential to rise

Analysts provide positive forecasts for gold after a 2-year increase in 2019 and 2020 (by 18.9% and 24.6% respectively). Notably, in August 2020, the precious metal skyrocketed by 80%. For the last two years, gold has been an important safe-haven asset amid high market volatility. The situation was mainly caused by the coronavirus pandemic that forced investors to switch to the precious metal. Gold helped to hedge funds from recession risks, stock market turbulence, surging inflation, and other black swans. According to estimates, gold’s potential to rise could be explained by both hedging and reasonable price. Most investors are able to buy the precious metal. Notably, gold is trading stably against the US dollar. That is why 2022-2023 could bring great gains.