Is 2023 Finally Gold’s Year?

Commentary

After a turbulent few months, things settled down. gold Prices have seen a steady rise in the fourth quarter of 2022. 

Recent price movement was helped by the dollar’s retreat, hopes that the Federal Reserve will slow down its aggressive monetary tightening, and renewed demand for the metal from emerging markets.

Is this the beginning a multi-year process? bull market What about gold?

Fairness be told, investors in gold have experienced years of underperformance. Two consecutive years of downturns saw gold close 2022.

In its 2023 outlook, the World Gold Council said that gold would enjoy a favourable economic environment. “stable but positive performance” The year ahead. It’s not an outright bullish view, as central banks around the world will continue to maintain a strong bias to fight inflation—and keep interest rates high, a deterrent to gold price increasing.

Recession is almost inevitable in many countries. In a classic recessionary economic environment, gold typically performs well. 

The continued decline of the U.S. Dollar is another encouraging sign that gold prices will rebound. The World Gold Council’s research indicates that peaking dollar value has historically been positive for gold, with a positive spot price movement during the 12 months after the dollar has peaked. 

Investors in gold should pay attention to the dollar. Gold’s approximately 10 percent price increase during the fourth quarter of 2022 very closely tracked to the dollar’s decline during the same period.

Cooling inflation—and therefore rate-hike expectations—is only one factor going against the dollar. A second factor is the improvement in economic growth expectations outside of the United States, such like in China and Europe.

China’s reopening will put further pressure on the dollar. Beijing announced during the last week in December the removal of the inbound quarantine for January. This move is expected to stimulate foreign investment and boost the economy of the country. 

Another major factor that affects gold prices is geopolitical risk. Gold can be used as a tail risk hedge in the event of political uncertainty or war.

Saxo Bank’s Head of Commodity Strategy Ole Hansen recently predicted that gold will top $3,000 per ounce in 2023 due to “war economy mentality of self reliance and minimizing holdings of foreign FX reserves, preferring gold.” This is in line with another prediction, that countries will invest in locking energy and commodity resources, as well as supply chain security. Saxo is bullish not only on gold but also junior gold miners.

No doubt this view has been informed by the ongoing war between Russia and Ukraine, and China’s continued saber-rattling against Taiwan. Russia’s largest bank—SberBank—on Dec. 26 announced launching a gold-backed digital financial asset, claiming that it offers an “alternative” investment amidst de-dollarization.

The biggest buyers of gold in this year’s 2018 were central banks. According to World Gold Council data, central banks bought a record 399 tonnes of gold in Q3 2022. China was the largest buyer of gold among them. Beijing is known for its efforts to reduce U.S. Dollar dependency. China was the front-runner to Russia being excluded from the dollar-dominated global financial market. Russia was faced with price caps, sanctions and freezing of its foreign exchange assets and energy exports.

There have been rumblings There are BRICS nations (Brazil India China Russia South Africa) that have joined forces to create a new reserve money backed with commodities like oil and gold. Although no such plans have been announced, certain BRICS countries have been working for years to diversify away the U.S. dollars. 

Despite this positive backdrop, there is still the possibility that gold will continue its slide. 

The Federal Reserve could increase interest rates and keep monetary conditions tight, despite economic recessions. This would be the worst case scenario. However, this policy path would go against the Fed’s recent history and philosophy. 

Fan Yu, an expert in economics and finance, has contributed analysis on China’s economy to this site since 2015.

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