Gold returns in 2021?

In the previous 3 years, gold was the best performing asset class in two years and the second-best performing asset class in one year. Year 2021, was surely disappointing. While the Nifty gave 23% returns, gold ended negative. What was the reason for this tepid performance by gold during 2021? Did the end of COVID scare bring about greater risk appetite among investors and make a case for other assets? But, first the drivers. 

What drove gold prices lower?

There were several reasons for gold to trend lower in 2021. Firstly, it was the return of certainty and growth to the global economies. That was a far cry from the uncertainty of 2020. Another important reason for the tepid show by gold was higher bond yields. Normally, when bond yield spike, it increases the opportunity cost of holding gold. Hence, investors prefer to hold risky assets that can give more than the bond  yield. Last but not the least, gold also came under pressure due to a stronger dollar, since gold is globally benchmarked against the USD. Fed hawkishness made the dollar stronger and that also had a very significant impact in pulling down gold. 

Gold 2022: What does it hold?

In terms of macro triggers, they are still likely to be against gold as an asset class. For example, the Fed is expected to hike rates 3-4 times in 2022. That is a lot of hawkishness and dollar strength built in. Secondly, most economies are likely to see full-fledged return to GDP growth in 2022. That would again make a case for risky assets like equities. What about the currency demand for gold due to debasement of currencies? As taper gets unwound, so will currency debasement. Also, more adventurous investors are likely to look at currency alternatives like cryptos and NFTs as a currency option, rather than gold. 

What about Gold in 2022?

It would be naïve to expect any kind of alpha from gold. That happened in 2019 and 2020, but they were exceptional years of high uncertainty. That is not the macro expectation for 2022. But, in the midst of all this churn, there will be a major role that gold will still play. Most portfolios are still concentrated on the traditional asset classes like equity, bonds, realty, liquid assets etc. There will still be portfolio demand for gold, not the ETF type but of the portfolio hedging types. If you missed out on padding up your portfolio with gold, use dips during 2022 to take gold holdings in your portfolio to the 10-15% range. As a long-term store of value, gold is still an incomparable asset class.