2023 could be a pivotal year for the metal, especially if central banks turn dovish
Gold. It has fascinated and bewitched humankind for thousands of years now. Most of us agree it looks nice, while its inherent attributes – it is reasonably fungible, its supply is relatively fixed and it is durable – are indisputable.
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When it comes to gold’s prospects as an investment, however, things get significantly more polarising. Gold bugs argue that the collapse of the gold standard in 1971 was a devastating blow to the economy, and horde significant chunks of their wealth in the shiny metal in order to hedge against rampant inflation. Naysayers argue that gold is a terrible investment.
How has gold performed historically?
I wrote this deep dive last May assessing gold’s performance historically. Looking at returns since 1971, I plotted gold against recessionary periods. The pattern is clear:
That is to say, gold performs counter-cyclically. It rises in price as the economy contracts. Investors flock to safety, and gold’s long history of stability and wealth preservation attracts capital in these times.
The other factor which moves gold is inflation. I plotted gold against inflation below, which highlights nicely how correlated the shiny metal is to the devaluation of fiat currency.
Gold has been struggling
The two aforementioned variables explain why gold has been ho-hum this year. Uncertainty has spiked to extremely high levels given events in Europe with Putin’s war – the impact of which can be clearly seen in March 2022 in the aftermath of the invasion, as gold’s price rose north of $2,000 per ounce.
However, on the flipside, the Federal Reserve and other central banks have been dogged in their stance that interest rates will be hiked to get on top of inflation. This determination to fight inflation as the number one priority means that gold’s biggest catalyst is actively being curtailed through tightened monetary policy.
As a result, this has served to pull back down the price of gold, which the graph shows has ticked down since April as we transitioned to this new interest rate paradigm.
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Gold opened 2022 trading at $1,830 per ounce, and closed it at $1,820 per ounce. While that seems very boring, investors worldwide would bite your hand off for boring right now, as portfolios are red and hurting all over following the demise of risk assets this past year, highlighted by the stock market closing down over 19%, its worse year since 2008.
Will gold go up in 2023?
I wrote about gold’s continued fall last September, as the Federal Reserve refused to budge on its stance that inflation was the number one priority.
Since then, gold has moved upward to claim a 6-month high, trading close to $1,850 a few days into 2023. Rising recession expectations over the last few months have pushed the metal upwards, with investors bearing the above chart in mind and moving into the metal in anticipation of tough itmes ahead.
Investors are betting that interest rates will be forced to peak in 2023 as recession threats grow, meaning gold will have its inflation narrative back. Some are even predicting that inflation could return with a vengeance after this fact.
“Inflation peaked,” Michael Burry, of the Big Short fame, tweeted on New Years Day. “But it is not the last peak of this cycle. We are likely to see CPI lower, possibly negative in 2H 2023, and the US in recession by any definition. Fed will cut and government will simulate. And we will have another inflation spike”
The other factor here is central banks purchasing gold. Banks accumulated a record amount of the metal last year, helping to support its price as assets elsewhere cratered.
But as will all assets, it will come down to what the Fed ultimately does. Economists are divided over when rate cuts will occur, as well as how quickly inflation can be curtailed.
My feel? I would not be surprised to see central banks turn dovish in 2023 as recession fears ignite, forced to cut rates. This dovish policy would do wonders for gold, which would spike off the inflation-busting narrative discussed earlier. But time will tell, and like most things these days, there is a hell of a lot of uncertainty to wade through first.
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