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Can OMICRON impact the price of Gold?

What rollercoaster gold prices have been on recently amid the new Omicron variant and throughout the year.

Gold rallied from a low of $1676 in Febreuary to a May high of $1916. It then fell back to $1680, and after registering a lower high at $1877 on November 16, it’s sliding once again. And this, regardless of the new strain.

Something that stands out in the above statement is the wildly fluctuating prices. Less obviously, after welcoming the new year at $1960, gold has lost almost $200 of its value in 2021.

Will Omicron add more pressure towards the end of the year or support the prices of gold?

As we close a challenging year, the precious metal continues to struggle because of the tapering of bond purchases as a new covid strain that is likely to stay makes an appearance.

With real rates remaining negative, it is essential to highlight the main reasons that impacted gold in 2021 and identify what might add to or remove from the headwinds in 2022.

What has been driving the prices of gold?

First things first, the prices of gold have been primarily volatile in 2021 because markets have been split between ‘transitory’ and somewhat permanent inflation expectations. Of course, the Fed played its role in the division.

As hedging did not take its natural course for several reasons, nervousness around Covid, ineffective jabs, and new variants added to the bearish bias as risk appetite rose on the prospect of hikes – given the impact of covid to the world economies.

As a result, one of the most bullish years for safe havens – theoretically- will most likely stay in history for being negative amidst increasing opportunity costs.

How could prices be affected going forward?

More recently, following the last speech from renominated Fed Chair Powell, the prospect of hikes turned into a signal, and a big question now remains unanswered: If the Fed being dovish for most of the year did not offer the gains one would expect in gold, what will?

This is probably an excellent place to examine the pros and cons of the prices of gold in 2022.

There are various theories behind the sell-off in 2021. On the one hand, concerns about supply chain constraints weaken demand for metals, and on the other, a rising dollar makes bullion more expensive, decreasing demand.

While both are true, market participants have been focused on risk-on assets throughout the year. It seems that the Fed’s stubbornness on seeing inflation “transitory” has paid off well.

In 2022, since the Fed made a hawkish appearance last week, it looks like rates are coming as the Fed admitted that “transitory” is no more. This is bearish, but there is hope for the world.

Why is Omicron so important for the prices of gold?

To everyone’s surprise, this time around, the new variant – Omicron- seems to be the cause of Fed’s U-turn, contrary to previous strains that added to the Fed’s dovishness, and this makes some sense: Fed’s QE and government’s stimulus has or is expected to at least have brought the jobs market back to where the Fed wanted to warrantee their next move.

In all truthiness, the Fed can’t keep printing money out of thin air as the money supply would – and it still might- cause the most significant economic crisis ever seen in the human history. It makes one wonder, is Powell the savior of the year?

With Omicron being the cherry on the top of the cake for Fed Chair, as every other single variant has only added pressure on the committee, he might be. But something has to be sacrificed instead – gold!

What to look for?

What will break gold will depend on the timing of the hike and whether it’ll be one or two hikes in 2022. So, there is still hope for gold.

In addition, a bullish driver for the prices of gold is negative inflation-adjusted yields.

It will then be more critical to expect to see whether a confirmation signal comes from yields rather than whether the Fed is going to hike or not to assess the performance of gold in 2022.

In addition, Omicron might impact global economies at a time of a solid recovery more than what markets seem to anticipate. With the new strain projected to stay with us for a while, and perhaps until the Fed’s scheduled bond purchases program in H2, one thing is for sure: gold prices will remain volatile until further clarity on one or the other.


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