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Despite market headwinds, gold managed to post a small gain in 2022 thanks to a strong rally in December.

Gold gained 3% in the final month of the year, driving the price of the yellow metal to $1,814 an ounce to close out 2022. This represented a 0.4% gain in the year.

The World Gold Council (WGC) called 2022 “a textbook example of gold’s stable and uncorrelated performance amid market turbulence.”

Gold charted much bigger yearly gains in other currencies.

• Euro – 6.7%
• Japanese Yen – 14.4%
• British pound – 12.5%
• Canadian dollar – 7.7%
• Australian dollar – 7.1%
• Indian rupee – 11.8%

It was a year of conflicting forces for gold.

A strong dollar and rising interest rates as the Federal Reserve tightened monetary policy to address stubbornly high price inflation created significant headwinds. Each rate hike by the Fed sent gold tumbling in dollar terms, particularly early in the tightening cycle.

Institutional buyers tended to stay away from gold and sold it off with every indication the Fed would continue tightening. According to the WGC, “Aggressive monetary policy in most Western economies and a strong safe-haven bid for the US dollar conspired to reduce interest in ETFs, futures and OTC investment.”

The WGC noted that long-term inflation expectations remained “conspicuously well-anchored” suggesting that institutional investors were convinced central banks could control inflation.

Peter Schiff has been emphasizing that the mainstream is wrong about the long-term inflation prospects.

That is the really important point that seems to be lost on everybody. What investors are trying to figure out is ‘has inflation peaked?’ Have we seen peak inflation? Now, I think the answer to that question is no. I don’t think inflation has peaked. Now, it may have peaked for a short period of time. It may take until the second half of 2023 before we get a year-over-year rate of inflation that was higher than the high water mark for 2022. Who knows? Maybe it will take into 2024. But the one thing that I’m certain of is that we’re not going anywhere near 2%. And that is what investors still don’t understand — that the days of low inflation are over, and we’re living in an era of high inflation. That is a complete game-changer for the Fed and the Fed has yet to come to terms with this new reality, nor has the market.”

But some people seem to understand this. On the other side of the equation, strong retail investment demand supported the price of gold and kept it from falling further. Retail demand for gold bars and gold coins hit an eight-year high in Q3. The World Gold Council said this was primarily driven by inflation concerns.

Our analysis suggests that retail investors, especially in Emerging Markets which make up about 60% 2 of the sector, are more wary of inflation – as well as the level of prices – given scant access to protection. Particularly for non-US investors, gold proved a lucrative investment in 2022, gaining well in their local currencies. In Europe and the US, retail investment stayed buoyant in the face of and heightened geopolitical risk.”

Strong central bank buying gave gold another boost.

Putting gold’s 2022 performance into historical context, the World Gold Council concluded that the price should have fallen much further given the dynamics.

Gold prices posted a small gain in a year when real yields (10-year TIPs) rose an unprecedented 250bps and the dollar gained over 8%. The previous largest annual rise in yields was 150bps with a flat dollar. That year- 2013- saw gold prices fall almost 30%. 2022 provided a textbook example of how diverse sources of demand and supply can counterbalance one another and provide gold with its uniquely stable portfolio-additive performance.”

While a 0.4% gain seems unimpressive, especially considering price inflation rivaled the 1970s, it’s important to put gold’s performance in context with other assets. Overall, gold was one of the best-performing assets of 2022.

Wall Street suffered through its worst year since 2008. The Dow was down about 8.8%. The S&P 500 fell by 19.4%, dropping more than 20% from its high. The Nasdaq took the worst hit, tumbling by 33.1%. Meanwhile, the bond market tanked, bitcoin collapsed, and the air started coming out of the real estate bubble.

Gold’s 2022 performance underscores its value as a portfolio diversifier. WGC analysis shows that gold’s volatility remained relatively low and that the yellow metal is not well-correlated with stocks and bonds.

The confluence of these opposing forces not only took gold to a small gain in 2022, but allowed its volatility to remain close to its long-term average of c.16% – while a 60/40 equity-bond portfolio experienced one of its most volatile years. Although gold’s correlation to a 60/40 portfolio was higher than its average (2.1) – along with the correlation between equities and bonds – it remained low at 20, an indicator of gold’s characteristic as a consistently reliable diversifier during market turmoil.”

Looking ahead to 2023, the World Gold Council expects “a stable but positive outlook for gold prices” with an increasing possibility of “a more severe economic downturn.”

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