For precious metals investors, 2021 had to be a very frustrating year. On the one hand, it's hard to imagine a more favorable mix of circumstances for the sector. Inflation was skyrocketing to the highest level in decades, monetary policy was extremely dovish and supportive, the federal government was running $2 trillion+ deficits in an effort to keep the economy going, and an environment of increased political and economic uncertainty.

On the other hand, the sector delivered lousy returns, while other sectors fared so much better. Gold (GLD  ) ended 2021 with a 5% YTD loss, while silver was down 14%. Compare this to the S&P 500's (SPY  ) 28% gain and 41% gain for the Invesco DB Commodity Index Fund (DBC  ), an ETF with exposure to all types of commodities.

One potential factor is that other investments offer better exposure to the trends and themes that drive gold. For instance, many investors buy gold as a hedge to protect against inflation. Clearly, companies in the materials, chemicals and energy space were able to capitalize on the increase in inflationary pressures through earnings growth and saw huge gains in their stock prices as they had sufficient pricing power.

Another reason that people buy gold is that they see it as an alternative currency that does well when people lose faith in the government. This has clearly happened on both sides of the aisle in recent years, yet it seems that cryptocurrencies are a better "currency alternative" than gold especially in terms of returns.

As we enter 2022, the fundamentals are much worse for gold. Inflation is expected to abate especially pressures that were more shortage or supply-chain induced. And, the Federal Reserve has adopted a hawkish stance and seems determined to end its asset purchases and begin hiking rates sometime in the spring or summer of next year.

Additionally, the recovery's fundamentals are on a solid footing which is more consistent with the beginning of an expansion rather than the end. These include rising asset prices, the strong jobs market, rising wages, household balance sheets, and low levels of leverage across the financial system. These developments, in tandem with the Fed and moderating inflation, mean that real rates are likely to keep rising in 2022, setting the stage for gold to underperform.