The gold price is back above $1,900, which was last seen in April 2022. This positive reaction on the year’s first days can raise hopes for a bright 2023 for the yellow metal.
There are several reasons to be optimistic, but we can count on very likely recession and geopolitical tensions that increase gold’s safe-haven demand. At the same time, we also expect Central banks to continue purchasing gold.
The positive backdrop can lift it to new records!
Watching behind always can help us to have a better prediction. Gold started 2022 also with a very positive outlook and even saw a 16% gain in the first quarter to test 2020 high above $2,075 once again, as high geopolitical risks raised demands. Later, with rising inflation, central banks, especially US Fed, started raising the rates, which ended with higher yields as well. After the sharp rate hikes by Fed, real yields on 10-year Treasuries, which measure the difference between nominal rates and breakeven inflation rates, moved from negative to positive territory. With raising a 10-year bond yield above 4%, gold prices fell sharply over the summer and at the end of Q3. Gold fell 22% from March peaks to September lows at 1,615, as the US dollar rally continued rising in line with Treasury yields. At the end of 2022, while it could recover some of its earlier losses, it had a better performance compared to Copper and Palladium, but it had a weaker performance than silver and platinum.
Uncertainty continues to dominate financial markets. We still have Covid risks in China, the war in Ukraine, and Iran’s internal tensions, which can threaten the Middle East and global security and energy prices. On the other hand, we have central banks’ monetary policies that can lead the global economy into a recession.
Gold has a strong relation with 10-year US real rates. Sometimes it is a direct relation, and sometimes, they move in opposite directions, depending on reasons. For 2023, as mentioned earlier, we have various risks; therefore, demand for safe havens will increase. Both gold and bonds are safe havens. More demand for bonds will decrease yields, and lower yields will increase the yellow metal demand. Also, higher market risks will move investors from equities and currencies to invest in gold, as happened in the 1970s. However, there is an important point here.
While many believe this demand rise can drastically increase the prices, even up to 4,000 dollars per ounce, the opponents of this idea have two reasons. Firstly we have to remain that higher risks will raise the US dollar demand as well, so a more expensive US dollar, even if it cannot decrease the price, would surely be able to slow down the bull runs. On top of that, if geopolitical tensions end in Iran and Ukraine with any achievements or peace negotiations, and central banks can find a way to support the economies, this Bull Run scenario can change. Even though it is less likely, it is also an option.
In the final summary, it is better to say that gold has a bright outlook as we have many risks, which can raise its demands. Still, at the same time, if we face a brutal recession or on the opposite point, if we reach peace and can overcome inflation, gold may suffer less than it did during the selloff in 2022, but it cannot raise too much as well. So while the bearish scenario does not seem so likely, investing in gold has fewer risks than many other markets, but its rewards also can be limited.
Furthermore, from the point of view of price prediction, gold will be in buy as long as it is above 1,800. Breathing above 2,000 will open the doors for at least $3,000. On the flip side, in a bearish scenario, under $1750, we can start selling, targeting $1,600.