The U.S. Mint recently announced that demand for physical gold hit its highest level since 2009. The mint said sales of its iconic American Gold Eagle coin were up 48% from the previous year, totaling some 1.25 million ounces of various denominations. Although gold saw some very strong months early in the year, the later months also saw heavy buying. The months of October and November both saw heavy physical demand as the threat of inflation became a reality.
It wasn’t only seasoned gold investors getting involved. The gold market saw a large number of new investors entering the market. Recent stock market volatility in the Dow Jones and Russell indexes shows how gold may be viewed as the only reliable source of money there is. In addition to market volatility, gold’s case as the only stable form of money on the planet is also bolstered by runaway government spending, massive sovereign debt levels and other economic issues. Ultra-low interest rates combined with QE measures have also lent credibility to gold’s reputation and may continue to do so if the Fed finds itself stuck and unable to raise rates enough.
The quantity of gold coins purchased by investors last year may just be the tip of the iceberg. The Fed has already announced plans to taper its QE purchases and has penciled in three rate hikes for 2022. Although this was initially viewed as being bearish for gold, some doubts remain that the Fed will be able to raise rates three times, regardless of what inflation may be doing. These doubts about the Fed have kept the price of gold from falling through the floor and may continue to do so in the months ahead. The Fed has done a great job of backing itself into a corner. The central bank will now have to try to find a way out, the only problem is there may not be one. If the Fed chooses to aggressively raise interest rates, the economy will slow and stock investors will likely run for the exits. If the Fed keeps rates low, on the other hand, inflation is likely to become even more out of control and price pressures may have a significant impact on the global economy.
The Fed appears to be in a can’t-win position regardless of what it chooses to do. This may keep buyers interested in the gold market despite any rate hikes or lack thereof, and may keep pressure on the Dollar Index. Any weakness seen in the dollar may also boost demand for gold as it has a tendency to exhibit a negative correlation.
Despite some recent volatility and weakness, the gold market may have a very encouraging 2022 to look forward to. Having maintained its recent trading range for several months now, the bulls could simply be gearing up for a major push higher that could take the metal to all-time highs or beyond.