Gold has been on a tear recently, with multiple catalysts pushing prices close to historical highs. Over the past six months, the price of gold has risen approximately 13%, to more than $2,000 per ounce. That’s within striking distance of gold’s all-time high of $2,075. People have been preoccupied by gold for thousands of years, and it has served as a robust store of value since antiquity. Today, gold can generate impressive returns—but only when market conditions are optimal. Some experts believe gold’s current rally is only just getting started, while others are more skeptical of gold’s potential to deliver more price gains.
One of the biggest catalysts for gold in 2023 has been the outlook for interest rates. The Federal Reserve has been aggressively raising interest rates for over a year in its ongoing battle to bring down inflation. The latest inflation numbers suggest the Fed is making progress in getting prices under control. In addition, an unexpected banking crisis in March tightened the credit market, which may also have helped cool the economy and slow inflation. Market participants now anticipate the Fed will pause rate hikes and pivot to rate cuts sooner than previously anticipated.
They see a nearly 70% chance of one more quarter-percentage point Fed rate hike in May and a 56% chance of a rate cut by July. Gold is widely considered to be an alternative universal currency, but one that earns no interest payments or any other cash flows. As a result, it has historically had a negative correlation to interest rates. That’s been the case recently as gold prices rallied to new highs while the outlook for interest rates dropped.
Gold also has a negative correlation historically to the U.S. dollar. Because gold is typically priced in dollars, a weak dollar means gold buyers pay more for the same amount of gold. The negative correlation between gold and the U.S. dollar has held up so far in 2023. The U.S. Dollar Index (DXY) is down 1.3% year-to-date, while the price of gold is up more than 10%. If the Fed begins to loosen its monetary policies in the second half of the year, the dollar could be pressured further. In fact, Eurizon SLJ Capital recently predicted the dollar could fall another 10% to 15% by mid-2024, a potentially huge drop for the world’s reserve currency.
Gold reached its all-time high of $2,075 back in August 2020. But a growing number of analysts expect the precious metal to surpass that prior peak in 2023. CMC Markets recently said a Fed pivot will trigger a sell-off in the U.S. dollar and tank bond yields, sending gold prices up to between $2,500 and $2,600 per troy ounce. Randy Smallwood, CEO of precious metals streaming company Wheaton Precious Metals (WMP), recently forecast gold prices to hit $2,500 per ounce.
Other asset managers are even more bullish on gold in 2023. In December, Swiss Asia Capital managing director and chief investment officer Juerg Kiener said mild global recessions in 2023 could send gold’s price as high as $4,000 an ounce by the end of the year.
Bank of America analyst Lawson Winder says a weaker U.S. dollar will drive gold prices higher by the end of 2023.
“BofA is bullish on gold in 2023, forecasting an annual average price of $2,009/oz. We think there could be a consolidation period in the coming months before the yellow metal resumes its ascent to a new all-time high,” Winder says.
The Bank of America commodities team forecasts gold price per ounce will reach $2,200 in the fourth quarter.
Gold prices are also driven by basic supply-and-demand dynamics—and there is plenty of demand for gold. Global gold demand increased 18% in 2022 to 4,741 tons, according to the World Gold Council.
Jewelry is the single largest global driver of physical gold demand. Central banks around the world also buy and hold gold to diversify their reserves. In addition, gold is used as a component in industrial and electrical devices and processes.
Buyers also directly fuel demand for gold bars, coins, and metals. Physically backed gold exchange-traded funds must constantly add to their gold holdings.
DataTrek Research co-founder Nicholas Colas says rising gold prices tend to stimulate global gold ETF demand, which peaked at between $10 billion and $11 billion per month in recent years.
“If global investor interest in gold starts to take off (as it often does when price momentum turns sharply positive), net ETF demand could be the fuel that takes the price of the yellow metal higher still,” Colas says. “We are neither gold bulls nor bears, but we do have a standing recommendation to consider a 3% to 5% position in a diversified portfolio.”
Gold prices could surge to $4,000 per ounce in 2023 as interest rate hikes and recession fears keep markets volatile, said Juerg Kiener, managing director and chief investment officer of Swiss Asia Capital.
The price of the precious metal could reach between $2,500 and $4,000 sometime next year, Kiener told CNBC’s “Street Signs Asia” last Wednesday.
There is a good chance the gold market sees a major move, he said, adding “it’s not going to be just 10% or 20%,” but a move that will “really make new highs.”
Kiener explained that many economies could face “a little bit of a recession” in the first quarter, which would lead to many central banks slowing their pace of interest rate hikes and make gold instantly more attractive. He said gold is also the only asset which every central bank owns.
Despite strong demand for gold, Kenny Polcari, senior market strategist at Slatestone Wealth, disagreed that prices could more than double next year.
“I don’t have a $4,000 price target on it, although I’d love to see it go there,” he said to CNBC.
Polcari argued that gold prices would see some pullback and resistance at $1,900 an ounce. Prices would be determined by how inflation responds to interest rate hikes globally, he said.
“I like gold. I’ve always liked gold,” he said. “Gold should be a part of your portfolio. I think it is going to do better, but I don’t have a $4,000 price target on it.”
Gold has played a significant role in the global economy for centuries, with its price being influenced by various historical events. Understanding the past can offer valuable insights into the current market dynamics.
The Bretton Woods Agreement (1944) established a fixed exchange rate system, pegging global currencies to the U.S. dollar, which was in turn pegged to gold at $35 per ounce. This Gold Standard linked gold prices to international trade and currency values.
In 1971, President Nixon ended the U.S. dollar's convertibility to gold, an event known as the Nixon Shock. The move detached gold prices from the dollar, allowing them to float freely in the market. Subsequently, gold entered a bull market in the 1970s, fueled by high inflation, oil shocks, and economic uncertainties, peaking at over $800 per ounce in 1980.
Gold prices experienced a prolonged bear market throughout the 1980s and 1990s, bottoming around $250 per ounce in 1999. The new millennium saw another gold bull market, driven by factors such as the 2000 Dotcom Bubble, the 2008 Global Financial Crisis, and quantitative easing measures. Gold reached an all-time high of $2,075 in August 2020.
Inflation: Gold is often seen as a hedge against inflation, and its demand can increase during inflationary periods, driving up prices.
Geopolitical and economic uncertainties: Gold is considered a safe haven in times of political and economic instability, which can elevate its value.
Central bank policies: Central banks' gold reserves and monetary policies can impact gold prices, as they influence currency values and interest rates.
Production and mining: Changes in gold production, mining costs, and industry consolidation can affect gold prices by altering supply and demand dynamics.
Market sentiment and investor behavior: Investor sentiment and behavioral factors, such as fear and greed, can drive gold prices up or down.
Gold can provide numerous benefits in a diversified investment portfolio. It can help reduce overall portfolio risk, offer a hedge against inflation, and potentially provide uncorrelated returns compared to traditional assets like stocks and bonds. Buyers can gain exposure to gold through physical gold, gold ETFs, gold mining stocks, and gold mutual funds.
Gold prices have historically shown resilience during recessions and market crashes, often acting as a safe haven for buyers. During the 1987 Black Monday, gold prices remained relatively stable as stock markets plummeted. In the aftermath of the 2000 Dotcom Bubble, gold prices began a multi-year bull run, offering a valuable diversification benefit for buyers. The 2008 Global Financial Crisis saw gold prices initially decline but subsequently surge to new highs as central banks implemented quantitative easing measures.
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