gold price outlook

Gold prices have risen to their highest level in eight months and analysts see more gains in 2023 amid expectations of a Fed pivot and a slowing global economy.

Gold prices hit their highest absolute level in 2020 after prices topped $2,000 per ounce. The precious metal hit a high of $2,074.88 on August 7, 2020. However, in inflation-adjusted terms, prices peaked in 1980.

Both the US stock and bond markets bled in 2022, and the two asset classes that traditionally move in opposite directions delivered negative returns. The bond market had its worst-ever year while the S&P 500 lost almost 20% and had the worst year since 2008 and the fourth worst overall.

Gold prices meanwhile managed to close 2022 around 0.4% higher, thanks to the gains in December. Here it is worth noting that since the US dollar appreciated against most currencies, gold returns in other currencies—both emerging and developed markets—were quite strong and in many cases topped 10%.

After the rise in December, gold is looking strong in January also and has surged to the highest levels since May 2022.

Stocks and Bonds Delivered Negative Returns in 2022

The stars were well aligned for gold in 2022 as well. US inflation surpassed 9% in June as prices were rising at the fastest pace in decades. Gold prices tend to do well in a recession as it is seen as an inflation hedge. While high inflation is generally negative for stocks, gold and some other asset classes can outperform.

The global economy also weakened in 2022 and many economies are either in a recession or staring at one in 2023. As an asset class, gold tends to do well in periods of economic turmoil. Rising geopolitical tensions and spike in oil prices were another positive for gold.

However, all these positives were overshadowed by a hawkish Fed. Fed started hiking its rate hikes in 2022 with the first hike since 2018. It started with a 25-basis point rate hike at the March meeting and then raised rates by 50 basis points at the May meeting. After that, it raised rates by 75 basis points in the next four consecutive meetings.

However, in December, the Fed slowed down on the pace of its hikes and raised rates by 50 basis points

Currently, the Fed fund rate is 4.25-4.50%. The December dot plot calls for another 75 basis point rate hike in 2023.

Why are Gold Prices Rising in 2023?

Gold prices started rising towards the end of 2022 amid hopes of a dovish Fed. While the US central bank has vowed to continue its battle against high inflation, multiple data points and leading indicators suggest that the price rise would gradually come down in 2023.

Incidentally, many economists believe that the Fed would need to cut rates in 2023 amid a slowing US economy. As a non-interest-bearing asset, gold stands to benefit from lower interest rates. There is a guide on how to trade in gold.

Meanwhile, even as Fed chair Jerome Powell has somewhat toned down his hawkish stance but has still not shown any inclination toward a pivot to rate cuts. He has instead cautioned against premature easing and the minutes of the Fed’s December meeting showed that FOMC members are concerned that markets might misread its stepped-down rate hike.

Analysts Expect Gold to Do Well in 2023

Most analysts are positive on gold and precious metals in 2023. In its report, the World Gold Council said, “We find that developments since the launch of our 2023 outlook have been consistent with the markets’ consensus scenario, but with a nod to a more severe downturn which could continue to be gold positive.”

Notably, some of the central banks, especially the People’s Bank of China have scaled up their gold purchases which are pushing prices higher. Central banks tend to maintain some of their reserves in physical gold and change the allocation tactically as well as strategically. There is a guide comparing some of the best gold brokers.

As for precious metal prices, Powell’s speech today and the December CPI release later this week could set the market direction.

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