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Gold Breaks Out as Inflation No Longer Transitory

April 01, 2022

Watch Time 9:16 MIN

VanEck Gold Strategy Deputy Portfolio Manager Ima Casanova discusses persistent inflation, rising rates, gold miners and more.

Jenna Dagenhart: Joining us now to share her outlook for gold is Ima Casanova. She's deputy portfolio manager, gold strategy at VanEck. Ima, first, how did gold perform in 2021?

Ima Casanova: I think 2021 for gold was driven by two main forces. On one side, you had the inflation story. And on the other side, you had higher rates, stronger U.S. dollar and the expectations for the Fed [U.S. Federal Reserve] to eventually raise rates. And so throughout the year, the dynamic of the gold market was driven by these two forces. And I think it was a bit disappointing of course to see gold not have a stronger performance in a year when inflation is starting to show up, because gold is supposed to be a hedge against inflation. But I think what's important to you remember is that there were several times throughout the year where gold's role as an inflation hedge was in full display. Earlier in May, later in November, gold did rise significantly when these prints were published.

And what would happen is as after gold would rise, the Fed would come out and sort of bring tranquility to the market saying that inflation is expected to be transitory and that the Fed has the tools to combat it, and then we would see gold drop again. And so those two forces were in play and we saw that reflected in heavy outflows from the gold bullion ETFs throughout the year. On the other side of the demand equation, we did see strong demand out of central banks and strong demand for bars and coins, which supported gold in 2021.

Jenna Dagenhart: Now what's your outlook for gold in 2022, given high inflation still and the geopolitical risks in the wake of Russia invading Ukraine?

Ima Casanova: Yes. As we come into 2022, of course at the end of last year, the Fed “dropped” transitory and so the market comes into 2022 pricing and inflation, a higher inflation for longer. And that's obviously supportive of gold prices. What we've seen in previous inflationary cycles is that gold tends to underperform other commodities in the first part of the inflationary cycle. And then in the second part of the cycle, which we could be entering or closer to entering, gold then outperforms other commodities. So it's almost like the markets take a little time to really digest inflation, to really believe that inflation is here, that it's elevated and it's going to be here for a while before it fully prices in and it reflects in gold's performance.

But ever since reaching its 2020 high of $2,075, gold has repeatedly failed to breakout. And what happened in February with the Russian invasion of Ukraine, is that gold finally has that catalyst that allows it to make a confirmed breakout. We're presently trading around the $2,000 level. So, gold has now established a new trend, a higher trend. And obviously because of the uncertainty and the risks that this war brings to the global economy and to the financial system, this is a very supportive environment for gold.

Jenna Dagenhart: So there are a lot of tailwinds for gold right now with inflation, Ukraine, that breakthrough you mentioned, but what about the headwinds such as the risk that come with a rising rate environment?

Ima Casanova: Yeah. So the Fed is expecting to start hiking rates very soon here, and they need to do that because they need to try to fight inflation. The question is really how successfully and how quickly can they do that? Because if the Fed can't fight inflation successfully, real rates, which are interest rates adjusted for inflation will remain very low, which has historically been a very positive environment for gold. So it's really the effectiveness of the Fed that will be a headwind or not for gold.

We're in an environment right now where last CPI [Consumer Price Index] print was 7.5%. Interest rates as I look are hovering around, 10-year trust rates around 2%. So this is a very negative real rate environment and it's very difficult to see negative rates becoming positive any anytime soon. With that said, even though increasing rates is negative for gold, there are risks with the Fed raising rates. What will it do to the economy? And obviously with the recent developments and the ongoing war, all of those risks to the global economy and to the U.S. economy, obviously are increasing.

Jenna Dagenhart: So Ima, it sounds like some of these headwinds such as the rising rate environment, could actually be tailwinds.

Ima Casanova: Exactly. And in fact, gold has typically outperformed following the first rate hike of the Fed tightening cycle, even though it underperforms ahead of it.

Jenna Dagenhart: Interesting. Now finally, I want to ask you about the mining companies, Ima. How has the miners conversation changed and how are they putting their cash to work in this kind of environment?

Ima Casanova: Yeah, the conversation has definitely shifted for the gold companies. We have gone from meeting with these companies and discussing reducing costs and cleaning up balance sheets and paying down debt and selling assets and that are non-core and really optimizing the operations and the portfolios. So these companies are finally in a very strong financial position and it's been several years now of generating a lot of free cash flow. These companies have now established shareholder return frameworks and policies where they're giving back a lot of this cash to shareholders in the form of dividends and share buybacks. So now the conversation has finally shifted to growth again, to project pipelines. There is enough cash to give back to shareholders and there's still cash now to put to work in growing the operations.

So the conversation has shifted to how really the sector can become stronger, how it can become more liquid and how it can become more attractive to the broader market. I know it's early stages of that, but I do feel like we are at the beginning of the transformation of the sector, of the gold mining sector, into one that is sustainable and that is an investable asset class throughout commodity cycles.

Jenna Dagenhart: That sounds like a lot of change and transformation on the horizon. Ima, thank you so much for joining us, and thank you to everyone watching. Once again, that was Ima Casanova, deputy portfolio manager, gold strategy at VanEck. I'm Jenna Dagenhart with Asset TV. And to receive regular updates from VanEck’s experts, please visit


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