Gold prices are staging a strong end to 2022 on hopes inflation has cooled while China continues to alleviate its stringent zero-Covid restrictions. Since the beginning of November, gold prices are up almost 13%.
Markets continue to price in recent U.S. data that showed cooler-than-expected inflation and consumer spending. This data could lift some burden off the Federal Reserve’s shoulders and allow it to slow the pace of interest rate hikes.
Rollercoaster Year for Gold Traders
Bullion soared 16% between the end of January 2022 and the beginning of March and was headed for its previous all-time high of $2,075/oz hit in August 2020. The rally was fueled by Russia’s invasion of Ukraine which pushed investors away from risk assets toward safe-haven gold.
However, gold prices then changed direction after the U.S. central bank delivered its first interest rate hike of the year in mid-March. The decline in gold prices accelerated as the Fed continued to deliver jumbo interest rate hikes until the end of Q3 2022.
The bullion lost 22% from its March highs to September, when it bottomed out at $1,615/oz. The fact that bears were unable to break below $1,600/oz on three different occasions in the second half of 2022 has also helped gold bulls to stage a year-end rally.
Following its Ukraine war rally, the yellow metal came under pressure as U.S. treasury yields rose and the U.S. dollar climbed toward its 20-year high. Further, China’s zero-Covid policy and strict lockdowns weighed on jewelry demand from one of the biggest consumers of precious metals in the world.
The safe-haven asset has had a mixed performance against other metals this year. It outperformed copper and palladium but lost the battle to silver and platinum. While gold’s price in 2022 has remained relatively flat, the yellow metal still has had quite a ride throughout the year.
2023 Outlook for Gold Prices
It’s that time of the year when analysts and strategists share their outlooks and set their targets for 2023. One of the most surprising calls for 2023 includes Saxo Bank’s forecast that gold prices will hit $3,000 per ounce in 2023, implying an upside of about 66% from Tuesday’s market price.
The bank’s Head of Commodity Strategy, Ole Hansen, believes gold prices could eventually exceed $3,000 due to the three key factors: the “war economy” mentality that makes gold more attractive than foreign reserves, states investing in national security, and increasing global liquidity.
“Under-owned gold rips higher on the sea-change reset in forward real interest rate implications of this new backdrop,” Hansen wrote in a blog post before adding:
“Gold slices through the double top near USD 2,075 as if it wasn’t there and hurtles to at least USD 3,000 next year,” is how Hansen believes the gold prices will trade in 2023.
Saxo’s bull case for gold is also based on the expectations that the dollar will weaken next year after a stellar 2022. This view is also shared by CRU analyst Kirill Kirilenko, who believes a more balanced approach from the Federal Reserve is likely to weaken the greenback, allowing “gold bulls more breathing space and energy to stage a rally next year.”
Gold is currently trading at a premium to its long-term historical correlation with 10-year real rates, while its correlation with the greenback remains negative. Last month, big asset management firms made a sharp U-turn, switching from net-short to net-long positioning on gold futures.
Going forward, the bullion could continue climbing in 2023 in case of a global economic slowdown and central banks’ pivot toward dovish monetary policy, especially in the U.S. This, alongside a further reopening in China, could boost gold by around 10% to $2,000/oz.
In the best-case scenario, gold could even surpass its all-time high if stagflation continues to deteriorate and central banks hold back further policy tightening. This would likely force investors to steer clear of bonds, equities, and currencies altogether, just like in the 1970s.
On the flip side, gold’s worst-case scenario next year would involve further monetary policy tightening and new major interest rate hikes by the Fed, refusing to relax monetary conditions during an economic recession. Still, the start of a recession could partially offset the adverse effects of high-interest rates, suggesting that the bullion may not suffer as much as it did during this year’s sell-off.
Strong Central Bank Demand
Global central banks purchased a record 399 tonnes of gold for about $20 billion in Q3 2022 in a bid to drive global demand for the bullion, the World Gold Council (WGC) said last month.
The yellow metal witnessed robust demand from jewelers and gold bar and coin buyers, the WGC wrote in the quarterly report. However, the report also showed that exchange-traded funds (ETFs) stored less gold for investors in the third quarter.
In addition, many investors offloaded their holdings in gold-backed CFDs and ETFs in the quarter amid higher interest rates, lifting returns on other assets.
Summary
Gold prices could continue to trade higher in the coming months after a strong year-end rally, fueled by the Fed pivot bets as well as improving risk sentiment surrounding China’s economy. Moreover, the latest media reports point toward robust demand for gold from the side of central banks, which is likely to continue in 2023.
Shane Neagle is editor-in-chief of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.