Market Speaks: Inflation Continues To Stay Key Factor For Gold Investors In 2022 Says WGC

21 Jan 2022 , 12:19 PM

The World Gold Council (WGC) stated in a latest update that Gold benefits from diverse sources of demand like investment, reserve asset, jewellery, and a technology component. It is highly liquid, no one’s liability, carries no credit risk, and is scarce, historically preserving its value over time. The metal does not directly conform to the majority of the most common valuation methodologies used for equities or bonds. Without a coupon or dividend, typical models based on discounted cash flows, expected earnings, or book-to-value ratios, struggle to supply an appropriate assessment for gold’s underlying value. Therefore, the World Gold Council to develop a framework to better understand gold valuation. This framework is based on four elements- Economic expansion, Risk and uncertainty and Opportunity cost.

WGC noted that inflation was a prominent global theme throughout 2021 and is still a key input into 2022 investor decisions. While many central banks (CBs) felt the uptick in inflation levels was temporary on the back of COVID’s impact in the first part of 2021, this consensus shifted in the latter part of the year. Meanwhile, supply chain bottlenecks caused by the pandemic have not fully dispersed. It is true that governments proved reluctant to respond to the recent spike in COVID cases with formal shutdown measures of the sort that disrupted economic growth over the last two years, but new variants could change this behaviour, and a resurgence of supply chain disruption – across multiple sectors from technology to shipping – could negatively affect economic growth and create additional inflationary pressure.

While the market expects rates increases and a strong US dollar a negative for gold price performance — real and nominal rates should remain at historically low levels. WGC analysis shows that gold has performed well into CB hiking cycles and has been an effective inflation hedge. Coupled with healthy jewellery and CB demand, and the potential for market volatility in a vastly changing world, the strategic rationale for gold in a portfolio particularly as a portfolio hedge remains compelling.

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