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Zim’s gold price expected to be volatile in 2022

By Eben Mabunda

Gold prices declined on Tuesday January 18, pulled by a firming dollar and higher US Treasury yields, as investors braced for indications on interest rate hike timelines meant to tame inflation, ahead of next week’s Federal Reserve policy meeting (Jan 25-26). This saw spot gold weakening 0,1% to $1 816,93 per ounce at 1600 GMT on Tuesday.

This serves as an indication of the volatility gold prices are expected to be subjected to in 2022, the latest World Gold Council (WGC), ‘Gold Outlook 2022’ report indicates. The WGC gold prices projections are neither here nor there as the global body has taken a cautious approach in its prediction of the outcome of the prices of gold in the year.

The Gold Council gave two contrasting possibilities that would weigh on the price of gold:

“Gold will likely face two key headwinds during 2022: higher nominal interest rates and a potentially stronger dollar. However, the negative effect from these two drivers may be offset by other supporting factors, including: high, persistent inflation, market volatility linked to Covid-19, geopolitics, and robust demand from other sectors such as central banks and jewellery.”

The report added that the price of gold would yield to the greater strength of either forces:

“Against this backdrop, gold’s performance during 2022 will ultimately be determined by which factors tip the scale. Yet, gold’s relevance as a risk hedge will be particularly relevant for investors this year.”

While gold is considered an inflationary hedge, it is highly sensitive to rising US interest rates, which increase the opportunity cost of holding non-yielding bullion.

Gold finished the year approximately 4% lower, closing at US$1 806/oz.

The gold price rallied into year-end on the heels of the rapidly spreading Omicron variant, likely prompting flight-to-quality flows, but it was not enough to offset H1 weakness.

Increasing the demand for gold, central banks around the world are increasing their gold reserves bringing the total to a 31-year high in 2021 on the back of rising concerns of having the greenback as a reserve currency.

According to the WGC, central banks have built up their gold reserves by more than 4 500 tonnes over the past decade. As of September, the reserves totalled roughly 36 000 tonnes, the largest since 1990 and up 15% from a decade earlier.

However, Goldman Sachs predicts that Bitcoin will take market share away from gold in 2022 as digital assets become more widely adopted. Goldman Sachs highlighted that the cryptocurrency currently has a 20% share of the “store of value” market as Bitcoin has a about US$700 billion market cap versus US$2,6 trillion worth of gold held as investments.

The latest data released by the Reserve Bank of Zimbabwe (RBZ) shows, deliveries of the yellow metal to Fidelity Printers and Refiners (Private) Limited in 2021 increased by 55,5% to 29,6 tonnes from 19,1 tonnes in 2020.

Small-scale producers contributed 18,4 tonnes during the year while large-scale producers delivered 11,1 tonnes.

The increased contribution of the small-scale producers can be attributed to the RBZ’s removal of taxes on small-scale miners in June last year and timeous payments to the miners.

In 2019, the Treasury department admitted that only 33% of gold produced in the country is delivered to the central bank while the Minister of Home Affairs conceded that US$100 was lost through illicit trade annually.

In the 11 months to November, Zimbabwe’s exports increased 39% to US$5,4 billion from US$3,9 billion in the prior year, driven by growth in exports of mineral products on the back of firm global commodity prices in 2021.

Notably, gold lead the exports at US$1,4 billion, followed by PGMs (US$1,1 billion), nickel ores and concentrates (US$956,7 million), tobacco (US$698.2 million), and ferrochromium (US$276,2 million).

Mabunda is a Financial Analyst and Business Anchor with Equity Axis, a leading Financial Research Firm in Zimbabwe. Twitter: @EbenMabunda.

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