Brace Yourself for a Roller Coaster Year of 2022

Brace Yourself for a Roller Coaster Year of 2022

We are now two-thirds of the way through the first month of 2022.

And it seems like the top markets of last year have quickly inverted to become the assets that are falling hard.

Cryptocurrencies like Bitcoin [BTC] and Ethereum [ETH] rose substantially last year, rising by 59% and 397%, respectively. They are down almost 10% and over 15% since the start of the year.

The Nasdaq Index rallied almost 20% last year. Its fortunes have reversed very quickly, giving back almost 8% in the last three weeks.

Meanwhile, our own ASX All Ordinaries Index opened the year at its all-time high of 7,927 on Tuesday, 4 January. We are now around 5% down and the trend is leaning towards falling further.

There is a well-known saying about how the market will perform for the year by looking at how the first few weeks play out in January.

It doesn’t help when the central banks are moving to tighten monetary policy.

If that does apply, then we could see a very wild 2022.

Central banks tightening into a destabilising economy

There is a Chinese saying of ‘the welcome rain’ that pertains to someone who comes or does the right thing at the right time.

Central banks appear to be the very opposite of it.

They are increasingly distinguishing themselves to do the wrong thing at the worst possible time.

The world has buckled under the strain of a locked-down economy in the last two years over the outbreak of the Wuhan virus and its many variants.

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Numerous countries are only beginning to attempt to return to pre-outbreak activities, albeit with many arbitrary restrictions. A large number of small businesses and households have experienced massive hardships thanks to these policies.

They’re hoping things can finally turn around if they comply to the many restrictions imposed by the government and health authorities.

They could well face a rude shock as central banks are now signalling they may need to act aggressively to tighten monetary supply soon. This is due to economic inflation remaining stubbornly high for longer than expected.

The governments and mainstream media may be trying to convince us that everything is fine with official data releases that point to a strong jobs market and rising GDP. However, it looks apparent to me that they’re deceptive in reporting these statistics.

You’ve noticed that grocery store shelves are going bare. And many regular items are either not available or are selling at much higher prices than before.

The actual economy is clearly entering into a phase of destabilisation. The massive stimulus spending, rampant market speculation, and prolonged lockdowns in the last two years are brewing conditions for a perfect economic storm. Cash has been going to the financial markets while the physical goods market has languished. The world went to chase yield as the reward for bearing risk became virtually zero off the back of uncontrolled deficit spending by governments.

Now, the central banks want to reverse the trend by increasing interest rates and reducing the supply of cash.

Things do not just normalise in an orderly fashion.

Far from it.

This is why I’m saying central banks are the complete opposite of ‘the welcome rain’. They are storm brewers.

Things could get unpredictable very quickly in the coming months, especially when central banks are now acting faster than they’re letting on to the public in their monthly meetings. This is quite the reverse of what they’ve done in previous years. Back then, they would talk about what they would do and delay doing it, now they seem to be bringing forward their schedule.

Hence, you need to prepare early so the anticipated storm does not catch you unaware.

A reverse in gold’s fortunes?

I’ve mentioned how the first few weeks of 2022 have seen the financial markets almost invert last year’s trends. Last year’s winners are the ones leading the retreat, and vice versa.

Gold and gold stocks had a rather underwhelming year last year.

You can have a look at the performance of gold in Australian dollars, gold stocks, and the ASX All Ordinaries Index below:


Fat Tail Investment Research

Source: Thomson Reuters Datastream

[Click to open in a new window]

The continual rhetoric from the US Federal Reserve about their plans to bring forward rate hikes to control inflation was successful in keeping gold down. This led to speculative interest in gold stocks gradually drying up and sent gold stocks down last year. If you look at individual gold stocks, you would see how ugly last year was.

A few established gold producers managed to finish the year higher. However, most of the speculative gold explorers suffered a price decline of more than 20% in 2021.

One thing that should gain your attention this week is that things seem to be turning around for gold and gold stocks.

A big jump in gold stocks on Wednesday trading in the US markets sent the NYSE ARCA Gold Bugs Index [NYSE:HUI] up more than 7%. The ASX Gold Index followed on Thursday with a 7.3% increase. The last time the ASX Gold Index rose by this much was in April 2020 off the back of the massive crash during the onset of the Wuhan virus outbreak.

It’s hard to say for sure if this is a clear change in the trend. After all, last year taught us to not call a rally too early given the three false gold rallies. And we can’t ignore the risky nature of the mining sector.

Nonetheless, gold and gold stocks are looking solid in the current economic backdrop.

God bless,

Brian Chu Signature

Brian Chu,
Editor, The Daily Reckoning Australia

PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.