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Plaque on office desk reading “2021 LOOKING BACK”

A Look Back at 2021: What Did We Learn?

AngelaRoberts

Written by Angela Roberts

Jan 6, 2022

How do you treat the start of a new year? For me, it’s a chance to reflect on the past 12 months and try to learn something new. Looking to the past can often help us better prepare ourselves—and our portfolios—for the future. We can’t determine precisely what will happen next, but we may be able to gain a better understanding of our current financial situation and perhaps find opportunities for growth.

For example, 2021 saw a strong—and at times uneven—recovery for the U.S. economy, but at the cost of massive government spending, increased debt, and rising inflation. Meanwhile, gold remained between $1,700 and 1,900/oz. for much of 2021 and may be poised for a strong 2022, especially as the Federal Reserve’s massive stimulus program comes to an end. There are lessons to be learned here, so I want to spend this week’s Gold News & Views examining those lessons as we head into 2022.

The first and possibly most important lesson we learned in 2021 is that diversification remains key to a balanced portfolio.

Partly because of a massive amount of government stimulus and the Federal Reserve keeping interest rates at historic lows, the economy saw growth in 2021. According to a December 17, 2021, article by Bloomberg, “The U.S. economy is on track for a strong finish to 2021 and a solid start to 2022.” However, the article also notes several challenges the economy faces, including “high inflation, staffing challenges, persistent [health concerns], and lingering supply constraints.”

Meanwhile, gold performed fairly well in 2021. According to information published by the World Gold Council on December 27, 2021, gold began and finished the year with prices above $1,800/oz.—several hundred dollars up from where gold was just three years ago. According to Dominic Schneider, head of commodities and APAC forex at UBS Wealth Management in Hong Kong, “Gold held up reasonably well given all the pro-growth development and all the normalization in monetary policy.”

Real estate and other alternative assets like cryptocurrencies also experienced gains in 2021. The lesson here is that diversification doesn’t have to mean reducing your overall upside potential. You may be able to experience growth while continuing to reduce your overall risk exposure.

Another lesson we learned in 2021 is that inflation will not be transitory.

“Transitory” is the term that was used repeatedly by Federal Reserve officials to describe the current state of increased inflation. That is, prices have risen quickly, and now there is uncertainty about when this “hot” inflation will cool down.

On December 29, 2021, CNBC reported that in the last two months of 2021, Federal Reserve Chair Jerome Powell “retreated from the stance that [inflation is] ‘transitory’ in nature.”

According to Liz Young, head of investment strategy at SoFi online finance company, “Now we’ve got this weird problem of inflation being high and a labor market that’s sort of stuck…. We got to the end of the year, and I think reality struck in the sense that as the stock market has been on this runaway tear, the reality of the situation is there are some cracks in the economic pavement.” CNBC continued by stating that high prices are expected to linger at least through the first half of 2022.

Knowing that gold has historically been used as a hedge against inflation, the lesson here may be that diversification will prove an even more powerful tool in 2022.

Third, we learned that gold’s popularity isn’t going anywhere in 2022.

Stacks of American Gold Eagle coins atop $100 bills

 

With gold’s performance in 2021 and news of continued high inflation well into 2022, gold may continue to see strong demand in the coming year. In an interview with Yahoo Finance published December 31, 2021, State Street Global Advisors Head of Gold Strategy George Milling-Stanley said, “I think that we’re going to see better performance than we’ve seen in 2021…. [Consumers] still believe that gold is offering them some protection against the unexpected, whether the unexpected is macroeconomic or geopolitical. There’s still plenty of potential for the unexpected to keep cropping up.”

As we look to the future, it’s important for us to look at the past and discover the lessons available to us there. The events of 2021 reiterate the importance of diversification, show us that we may have to prepare ourselves and our portfolios for continuing high inflation, and illustrate once again that physical gold will likely continue to see demand despite our increasingly digital world.

But lessons are only as good as what we do with them. So now we must ask ourselves: If these are the lessons we can gain from 2021, how will we use them in 2022?

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