By Scott Kanowsky
Investing.com -- On the seal of the state of California a miner pans for gold below the Greek motto "Eureka" - "I've found it." These days, investors in the yellow metal may find their excitement muted in comparison to the soaring optimism of 19th-century fortune seekers.
Gold is typically considered a safe haven in times of economic turmoil, but over a large part of 2022 the market's perception of the commodity has been in flux. Much of that stems from the Federal Reserve and its ongoing quest to cool red-hot inflation back down to its 2% target.
Prices have been driven up by supply shortages linked to Russia's war in Ukraine and lingering COVID-19 lockdowns in China. In response, the Fed has hiked interest rates aggressively, which has in turn rubbed some of the shine off of a non-income asset like gold and shifted attention to the relatively high-yielding U.S. dollar.
But since November, the sentiment around gold has seemingly turned a corner. This week saw prices hovering at one point near a six-month high, buoyed by U.S. data on Tuesday that showed inflation in the world's largest economy eased by more than expected to 7.1% in November.
Investors suspect that if the Fed thinks that it has succeeded in softening inflation, then the central bank will pull back on increasing borrowing costs. This could subsequently take the air out of the U.S. dollar's recent rally and heighten the allure of gold.
On Wednesday, the Fed hiked interest rates by 50 basis points, edging away from a months-long string of larger 75 basis point increases. Fed chair Jerome Powell celebrated the slowing in headline price growth, but flagged that rates were still likely to peak at higher-than-expected levels.
That last bit of hawkish language was enough to all but quash this week's rally in gold prices, with the spot price dropping below the key $1,800 resistance level.
Even still, recent returns for gold have been resilient, but not spectacular. Spot gold prices are up over 1% in the past one-year period; by contrast, the S&P 500 has dipped by more than 13%, while supposed "digital gold" Bitcoin has tumbled by more than 61% year-to-date.
Central banks around the world, in particular, are keeping their faith in the currency. According to the World Gold Council, these institutions have been accumulating reserves in the commodity this year at their fastest pace since 1967, as they seek to diversify their holdings and hedge against inflation risks.
Meanwhile, a seven-month run of net outflows at global gold ETFs slowed in November, thanks in large part to a weaker dollar and falling yields.
Demand for gold jewelry also remains strong, with data provider Statista forecasting that the value of the market will rise from about $230 billion in 2020 to about $307B by 2026.
China, which represents the lion's share of jewelry revenue, is finally seeing a widespread loosening in COVID-19 restrictions that could help unshackle some consumer spending.
Shoppers in India, where gold plays a key role in the country's festive season every October, saw jewelry consumption have its strongest third-quarter since 2018. However, higher-than-average inflation is still expected to weigh on sales throughout the rest of this year.
Despite these glittery developments, gold's future is uncertain. The global economy now faces a potential inflection point, highlighted by the possibility of slowly fading - but stubbornly elevated - inflation and sluggish growth.
In its 2023 outlook, the World Gold Council noted that this situation could serve as both a headwind and tailwind for the metal.
"A mild recession and weaker earnings have historically been gold-positive," the organization argued. But it warned that ongoing pressure on commodities due to a slowing economy in the first half will likely weigh on gold's appeal.
"On balance, this mixed set of influences implies a stable but positive performance for gold," the World Gold Council concluded.
That may not exactly be a rousing, "Eureka!"-style chorus, but perhaps it will be enough to keep gold's supporters singing its virtues next year.