Gold has long been regarded as a reliable safe-haven asset, often seen as a hedge against economic uncertainty, therefore its value often rises during times of market volatility. As such, investors and traders alike, have been closely monitoring the price of Gold as they seek to capitalise on its potential for profits. With 2023 well underway, we thought now is a good time to analyse the Gold market and gather experts’ thoughts on the direction of Gold over the course of 2023.
What has Gold done so far?
After the Russian invasion of Ukraine in the spring of 2022, Gold rallied sharply however this move was only temporary as it then gave away all of its war-tension-based gains and declined from March until November 2022. USD strength eroded all of the initial Gold price gains and more. Currently, markets are trying to make sense of where the future direction of the global economy is headed next.
If we take a look at the Gold chart we can see how the price has reacted to the key levels shown:
At the start of 2022, the price of Gold rallied from lows of around $1,780 to just over $2,070 in March, almost matching the highs seen during COVID, due to the uncertainty surrounding the conflict, whether NATO would intervene, etc. However, the rally quickly dissipated as the price fell sharply to lows of $1,620 by September 2022. This sharp drop was mainly due to the backdrop of a stronger Dollar as central banks reacted to high levels of inflation by hiking interest rates. In November 2022, Gold began to rally all the way back up to $1,960 in a little over 3 months once inflation in the U.S. started showing signs of slowing down. Since then we have seen Gold retrace back to $1,835 which is roughly the price it was at the start of 2023.
What is the outlook for gold during 2023?
In order to make educated predictions of what may happen next for the gold market, it is important to consider the global macroeconomic environment. Gold has been at the forefront of investors’ minds as the global economy continues to recover from the pandemic’s impacts and rising inflation across the world. Despite continued interest rate hikes and falling inflation, the figure remains stubbornly high and well above most central banks’ 2% target.
This coupled with rising tensions between major world powers (Russia and the West, China and the USA for example), historically, investors in similar scenarios would sell their ‘risky’ assets (such as equities) and buy gold to protect their wealth. The traditional store of value is seen as a safe-haven asset in times of uncertainty. This could, but not always, result in higher gold prices, going forward as investors look to protect their wealth.
So, what could happen next?
This will depend on both the strength of the US economy (and the ability of the Federal Reserve to tackle inflation) and the escalation of the Russia-Ukraine conflict. If inflation continues to fall with interest rate hikes, the price of gold may recover as the USD weakens. However, if inflation persists and the Fed struggles to contain inflation back to its 2% target we could see gold drop further back towards the $1,600 level.
Alternatively, if the conflict escalates further, with more advances from the Russian army, we could see high-impact events occur. The gold market could soar back up to the $2,000 highs, as people flock to the traditional store of wealth as a form of protection against the warfare unfolding. This is likely to take the form of the war indicating signs of spreading or more serious weapons being used, particularly any use of nuclear warfare materialising.
According to geographical reports, both sides are about to enter Mud season, also known as “Rasputitsa”, where between late March and May the land becomes extremely muddy from the melting snow. The thick mud becomes almost impossible for tanks to travel through, causing a slowdown in the war efforts. After May, is when we will likely see the conflict unravel further as both sides make up for the lost time. Any major developments would likely see the price of gold reverse back towards highs as investors seek safe-haven investments. However, until then it is likely that developments regarding inflation and USD strength will be the main driver behind Gold prices.
We spoke to Cameron Parry, CEO of TallyMoney, to get his view on what will drive Gold prices in 2023: “Public trust in the banking industry has been in short supply ever since taxpayers had to bail out several of the biggest banks during the financial crisis.
“But the past year has seen many people lose what little faith they had left, as the penny drops that banks have applied double standards in their response to the rising base rate. While the big banks lost no time in hiking interest rates on mortgages, they’ve been painfully slow to pass on interest rate increases to savings customers.
“This frustration is what drove this month’s public grilling of bank bosses by the UK’s Treasury select committee. But it is also prompting tens of thousands of savers to look for better returns than the puny interest rates offered by bank savings accounts.
“Gold has been a safe haven investment for hundreds of years, and at Tally we’ve seen a surge in demand from new customers opting to keep their savings anchored in gold, rather than watch them earn derisory levels of interest in a conventional pounds savings account.”
Could this distrust in the banking sector cause investors to seek alternative investments to traditional saving accounts such as Gold, result in Gold rallying back to $2,000?
To conclude, the future of the gold market will most likely be determined by a combination of the unfolding of the current Russia-Ukraine conflict and how policymakers can tackle inflation. If inflation continues to fall back towards the Fed’s 2% target, then investors will likely flock back to equities for high-yielding returns. Alternatively, if inflation is not managed and, or the Russia-Ukraine conflict progresses rapidly, then the global demand for gold is expected to rise. In this case, the price could rally beyond the $2,070 level, to all-time highs, as investors fear the worst could be yet to come.
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