Several analysts predict that gold prices will rise by 10% or more in 2023. Gold-focused stocks, which provide leverage to the price of gold, are expected to outperform. As a result, gold bulls may want to consider adding some gold-focused equities to their portfolios in order to gain from gold’s possible price appreciation.
Will Gold Shine In 2023?
If you’re looking for gold and silver investment prospects, you should consider adding gold and gold miners to your portfolio in 2023. Several considerations point to these assets outperforming the overall market and providing good risk-adjusted returns.
An rise in central bank purchasing is one aspect that could influence the price of gold in 2023. As central banks seek to diversify their foreign exchange holdings, gold as a safe-haven asset may be considered. Additionally, increased jewelry demand and limited gold mine supply may strengthen gold prices.
Gold miners, as represented by the VanEck Vectors Gold Miners ETF (GDX), provide investors with exposure to the gold market as well as the potential for high gains.
A Look At 2022 Gold Performance In The Market
The price of gold, as measured by the NYSEARCA:GLD index, has fallen 1.2% since the beginning of the year through December 29th. This is a stronger result than the gold miners index and junior miners, which returned -7.42% and -12.02% during the same time period, respectively.
While gold and gold miners have underperformed since the beginning of the year, they have outperformed other assets such as the Dow Jones and S&P 500, which have experienced negative returns of 9.25% and 19.83% over the same time period, respectively.
Assets Performance In 2022
Despite rising levels of inflation and global unrest this year, gold has outperformed alternative assets such as cryptocurrencies such as bitcoin. This startled many investors, especially given gold’s historical significance as an inflation hedge.
The rising value of the US dollar, which has been pushed by the Federal Reserve’s aggressive activities, including rate hikes and quantitative tightening, has been a major contributor to gold’s underperformance.
Under fact, gold has performed significantly better in weaker currencies. Gold, for example, has climbed by 15.5% when priced in Japanese Yen; 15.18% when priced in Euro; 9.19% when priced in Chinese Yuan; and 71.57% when priced in Argentine Peso.
Figures from GoldPrice.Org
Gold is frequently regarded as a safe haven asset, or an investment that is predicted to retain or even gain in value during times of economic turmoil. However, in recent years, other assets, such as iBonds, US treasuries, and high-yield savings accounts, have been viewed as safe havens due to their capacity to provide a dividend that can be appealing to investors.
This increased competition from other safe-haven assets could have had a minor impact on gold’s price performance.
Gold, unlike iBonds, US treasuries, and high-yield savings accounts, does not provide a yield. It is primarily purchased and maintained as a hedge against inflation and market volatility.
Due to greater inflation rates in the past, iBonds were recognized for providing a high yield. Similarly, in recent years, high-yield savings accounts have offered higher interest rates, making them more enticing to investors looking for a return on their money.
Overall, while gold is still seen as a reliable safe haven asset, growing competition from yielding assets may have had an impact on its price performance.
Top Factors That May Drive The Price of Gold In 2023
There are several factors that suggest gold may experience strong returns in 2023. Here are three potential drivers of gold’s bullish performance in the coming year:
New FED Purchases
Chart from Refinitiv GFMS
Over the last 13 years, central banks, particularly in China, India, and Turkey, have purchased gold at an unprecedented rate, which has recently accelerated. This is done to diversify their foreign exchange holdings and lessen their dependence on the US dollar.
Based on the World-Gold-Council, year-to-date central bank gold demand is 673 tons, above all annual totals since 1967. Global central banks dramatically raised their purchases of gold in the third quarter of this year, totaling about 400 tons, the greatest amount of demand from this sector in World Gold Council records dating back to 2000. This tendency is projected to continue in 2023, potentially raising gold prices.
An increase In Demand For Jewelry
According to the World Gold Council, gold jewelry demand reached 523 tons in Q3 2022, a 10% increase year on year. Demand for gold jewelry is likely to rise further in China, the world’s largest gold jewelry market, as the country eliminates COVID-related regulations and reopens its economy.
Cultural beliefs and the expanding prosperity of China’s middle class drive demand for gold jewelry, which regards having gold as a sign of excellent financial planning and a promise of good fortune. The Chinese people are likely to expand their gold holdings in 2023.
Low Supply of New Mines
Source: World Gold Council
Mining is the largest source of gold supply, accounting for around 75% of yearly gold production. Global gold mine production peaked in 2018 and has been reasonably stable since then, according to the World Gold Council.
The council announced that overall gold supply climbed marginally (by 1% year on year) to 1,215 tons in the third quarter of 2022. The council did note, however, that new discoveries of high-grade, commercial gold prospects are becoming increasingly scarce.
Furthermore, the economic feasibility of gold mining operations is being hampered by growing prices, such as inflation, which raises the costs of establishing and maintaining a mine. As a result of these reasons, the availability of gold in the future may be limited.
Federal Reserve’s Favorable Rate Policy
The Federal Reserve is the central banking system of the United States and is responsible for implementing monetary policy in the country. It is a quasi-independent agency that operates within the framework of the U.S. government and is charged with the responsibility of regulating the supply of money in the economy.
In recent years, the Federal Reserve has been engaged in a process of normalizing monetary policy after a period of exceptionally low interest rates following the global financial crisis of 2008.
This has involved a series of gradual increases in the benchmark interest rate, known as the federal funds rate, which is the rate at which banks lend to one another overnight.
However, it is expected that at some point in the future, the Federal Reserve will pivot to a stance of cutting rates, rather than raising them. This could happen if the economy begins to slow down or if there is a significant increase in the risk of deflation, which is a persistent decline in the overall level of prices in the economy.
Cutting interest rates can help stimulate economic activity by making borrowing cheaper, which can encourage businesses to invest and consumers to spend. It can also help to boost asset prices, such as stocks and real estate, which can in turn lead to increased economic activity.
The timing and magnitude of any rate cuts by the Federal Reserve will depend on the state of the economy and the risks it is facing at the time. The Federal Reserve will carefully consider a range of economic indicators, including employment, inflation, and financial market conditions, when making its decisions on monetary policy.
Lower interest rates are generally viewed as positive for gold prices, as they reduce the opportunity cost of holding gold (which does not pay interest) and make it more attractive to investors.
Interest rates are one of the main factors that can influence the demand for gold, as they can affect the attractiveness of gold as a store of value or a hedge against inflation. When interest rates are low, investors may be more inclined to purchase gold as a safe haven asset, which can drive up its price.
A Weak USD
The value of gold is influenced by a variety of factors, including supply and demand, global economic conditions, and investor sentiment. The value of the U.S. dollar can also have an impact on the value of gold. When the value of the dollar is strong, it can make gold less expensive for foreign buyers, which can lead to lower demand and a decline in the price of gold.
On the other hand, when the value of the dollar is weak, it can make gold more expensive for foreign buyers, which can lead to increased demand and a rise in the price of gold. It is worth noting that the relationship between the value of the dollar and the price of gold is complex and can change over time.
Gold Prices Forecasts For 2023
Price predictions for gold in 2023 vary significantly, with some forecasting prices as low as $1,550 per ounce and others predicting prices as high as $4,000 per ounce. It is likely that the actual price of gold will fall somewhere in the middle of these targets, but the market is likely to be volatile throughout the year.
Most likely, gold is expected to trade in a range between $1,800 and $2,000 per ounce in 2023, but end above $2,000 should the fed cut interest rates.
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