With Systemic Risks Everywhere, Find Safety in Gold

Hathaway notes that despite shrinking mine supply, high physical demand, low interest rates, and problematic inflation, the price of gold failed to advance much in 2021. Gold mining stocks fell 9.25%, and bullion prices dropped 3.64%. Hathaway’s report summarizes that, “What stymied interest in precious metals over the past twelve months was the lure of strong equity market returns, the prospect of tighter monetary conditions and an infatuation with all things crypto. We expect things to be different in 2022.”

If demand for gold surges in 2022, supply won’t be able to keep up. New mines are increasingly challenging to open, even in countries that were traditionally friendly to mining. This could further be favorable to gold’s price. As supply has flagged, demand in Asia has surged. Notably, India’s gold demand has reached a six-year high.

Sources: The World Gold Council (2014-2020), Metals Focus Ltd. (2021 Estimate).

Hathaway notes, “Liquidations of gold-backed ETFs, the largest since 2013, have so far masked resurgent Asian demand. In 2021, total ETF outflows represented US$9 billion. We believe that a diminution, or positive turn, in gold-backed ETF liquidations combined with strong Asian demand would overpower the predisposition of macro traders to short the metal on every threat by the Federal Reserve (“Fed”) to jack up interest rates. This combination also means that a potential new high in the gold price (surpassing its August 2020 high of $2,064) would come as no surprise.”

An equity bear market — which seems highly likely — could be the catalyst that gold needs to finally break out of its slump and start demonstrating its traditional inflation strength.

At the December 14, 2021, American Council for Capital Formation (ACCF) webinar, former U.S. Secretary of the Treasury Larry Summers stated that there is a risk of “spontaneous deflation of capital markets.” Summers added that “The Fed will have a very difficult time of organizing a soft landing…. All the efforts at disinflation we have had historically, where it was clearly established that inflation has been too high and the Fed acted, have ended in recession.”

Fed policy is poised to take a hawkish turn, which will abruptly cut off liquidity and send ripples across the entire economy. Hathaway sees gold as not just an inflation hedge, but also as a hedge against “systemic risks,” noting that systemic risks abound in the current market. Inflation could very well topple the entire system, creating a recession and causing gold’s value to surge.

Investors can get exposure to physical gold through the Sprott Physical Gold Trust PHYS. PHYS is fully allocated to gold that is safely stored, easy to buy or sell, and redeemable. The Sprott Physical Silver Trust (PSLV ) offers exposure to silver. Meanwhile, gold equities exposure can be gained through the Sprott Gold Miners ETF (SGDM B-) and the Sprott Junior Gold Miners ETF (SGDJ C+).

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