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This should have been gold’s year. It sure seemed like all the pieces were in place – copious inflation, tumultuous financial markets, a world awash in turmoil.

Gold’s reputation as a haven from market chaos and a hedge against inflation simply hasn’t held up in 2022.

In fact, gold has lost ground, tacking on another disappointing year to a slump stretching back a decade. Gold futures, after starting the year at roughly US$1,830 an ounce, are now trading at less than US$1,750 an ounce (December contract), which is nearly 15 per cent off the year’s peak set in March.

Rising interest rates and bond yields dealt the blow to the bull case for gold this time around. The strongest U.S. dollar in years hasn’t helped either.

The forces working against gold are too potent to hope for any meaningful improvement in the months ahead, said Christopher Louney, a commodity strategist at RBC Capital Markets. “It’s just very challenging for gold to rally in the face of rising rates and the strong dollar.”

A little further out, however, perhaps later in 2023, a positive setup for gold is brewing. But a lot will need to come together. Clearly, inflation alone can’t bring on the glory days envisioned for years by many gold bugs.

“There’s a misperception that inflation is the most important driver of gold,” said David Pepall, a portfolio manager at Aventine Investment Counsel in Toronto.

Under the right circumstances, gold can provide a refuge from rising prices. But the metal has a far stronger relationship to real bond yields, which are adjusted for inflation.

A knock against gold is that it pays no interest. This isn’t a deal-breaker when policy rates are close to zero and much of the world’s government debt is trading at negative yields, as was the case just prior to the pandemic.

But rates and yields around the world have taken a dramatic turn upward this year, as central bankers have tried desperately to get inflation under control.

Fixed-income investments, as a result, have undergone a mass reappraisal. Investor appetites have shifted away from non-yielding assets like gold, and toward bonds, savings instruments, and even cash.

The disappointment among gold’s faithful is palpable. This is a year featuring the worst inflation in a half-century, war in Ukraine, an energy crisis in Europe, the popping of a stock market bubble and a powerful sell-off across the spectrum of risk assets, from real estate to cryptocurrencies.

It’s often said that gold loves a crisis. But not all crises, evidently, and certainly not the current one.

“Gold tends to perform well in those scenarios where you have lots of financial and economic fallout,” Mr. Louney said. Normally, when those conditions are in abundance, you wouldn’t also have central banks hiking rates with abandon.

“This isn’t normal,” Mr. Louney said.

Over the past few weeks, however, gold has gone on a bit of a run, gaining 7 per cent after hitting its lowest price in two-and-a-half years. This mini-rally coincided with a pullback in U.S. Treasury yields, as well as some relief when the U.S. Consumer Price Index rose by slightly less than expected in October.

Some market strategists are seeing the makings of a more sustained run in gold, based on some combination of residual inflation and a pause in the U.S. Federal Reserve’s rate-hiking campaign.

“The market is still clearly expecting more rate hikes in 2023, but it’s also starting to sniff out that we might be past peak hawkishness,” Mr. Pepall said. There was a similar setup back in 2000, he added. After the Fed stopped hiking rates, gold ultimately went on a streak that lasted a decade.

The risk of an economic hard landing, and subsequent recession, is the thing that is most likely to compel the Fed to relent, Mr. Pepall said.

“I think that would be negative for the stock market and positive for gold – finally.”

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