The latest Sprott Gold Report from Sprott Managing Director and Senior Portfolio Manager John Hathaway examines the outlook for gold in 2022.

Hathaway notes that despite dwindling mining supply, high physical demand, low interest rates and problematic inflation, the price of gold hasn’t made much progress in 2021. Gold mining stocks fell 9.25% and bullion prices fell 3.64%. Hathaway’s report summarizes that “what has hampered interest in precious metals over the past twelve months has been the lure of strong stock market returns, the prospect of tighter monetary conditions and a craze for everything regarding cryptography. We expect things to be different in 2022.”

If the demand for gold increases in 2022, the supply will not be able to follow. New mines are increasingly difficult to open, even in traditionally mining-friendly countries. This could also be supportive for the price of gold. As supply waned, demand in Asia surged. Notably, India’s gold demand hit a six-year high.

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

Hathaway notes: “The largest gold-backed ETF sell-offs since 2013 have so far masked the resurgence of Asian demand. In 2021, total ETF outflows were US$9 billion. We believe that a decrease, or positive development, in gold-backed ETF liquidations, combined with strong Asian demand, would reverse macro traders’ predisposition to short the metal at every threat from the Federal Reserve. (“Fed”) to raise interest rates. This combination also means that a potential new high in the price of gold (exceeding its August 2020 high of $2,064) would not come as a surprise.

A bearish stock market – which seems very likely – could be the catalyst gold needs to finally emerge from its meltdown and begin to demonstrate its traditional inflationary strength.

During the American Council for Capital Formation (ACCF) webinar on December 14, 2021, former US Treasury Secretary Larry Summers said that there is a risk of “spontaneous deflation in capital markets”. Summers added that “the Fed will be hard pressed to engineer a soft landing…. Every disinflation effort that we have had historically, where it was clearly established that inflation was too high and the Fed acted, ended in a recession.

Fed policy is about to take a hawkish turn, which will cut liquidity sharply and send ripples throughout the economy. Hathaway sees gold not only as a hedge against inflation, but also as a hedge against “systemic risk,” noting that systemic risk abounds in today’s market. Inflation could very well turn the whole system upside down, creating a recession and causing the value of gold to skyrocket.

Investors can gain exposure to physical gold through the Sprott Physical Gold Trust (PHYS). PHYS is fully allocated to gold which is securely stored, easy to buy or sell and redeemable. the Sprott Physical Silver Trust (PSLV) provides exposure to silver. Meanwhile, exposure to gold stocks can be gained through Sprott Gold Miners ETF (SGDM) and the ETF Sprott Junior Gold Miners (SGDJ).

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