Gold regained the $1,800 level in late 2022 after trading below $1,640 at the end of the third quarter. It failed to act as a hedge against inflation despite historically acting as one.
Therefore, heading into 2023, gold investors are optimistic about future returns for the following three reasons:
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- Gold has performed well in recessions
- Gold has great returns after the dollar index (DXY) peaks
- Stagflation leads to positive returns for gold investors
Gold does well in recessions
According to most economists recently surveyed by Bloomberg, an economic recession in the United States is just around the corner. When the world’s largest economy enters recession, it drags other major economies too.
Gold does well in recessions. In five out of the last seven recessions, gold delivered positive returns.
Gold has great returns after DXY peaks
Many investors believed that the DXY would peak in 2022 as the Fed started to pivot. Indeed, the US dollar reversed course in October, and a peak in the dollar index coincides with the Fed slowing the pace of its interest rate hikes.
During previous cycles of dollar strength, gold delivered positive returns in the next 12 months after the DXY peaked – 13% in 2016 or 31% in 2002. Therefore, there is a strong correlation between the price of gold and the US dollar.
Stagflation favors gold historically
Stagflation is a period of high inflation and high unemployment. According to the latest Fed forecasts, the unemployment rate is about to bounce from the current low levels.
Also, inflation is well above the Fed’s target. Even with the current decline in inflation, the prices of goods and services are still forecast to remain elevated.
Disinflation is a period when inflation keeps rising, albeit at a slower pace. Hence, one should not rule out stagflation in the months ahead, given that the unemployment rate is about to bounce.
Historical data suggests that gold outperforms stocks, bonds during stagflation.
All in all, 2023 might be the year when gold recovers the lost ground and starts being a hedge against inflation. If the unemployment rate bounces from the lows, chances are even higher that gold will deliver positive returns in 2023.
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