With markets in the third week of 2023, gold is already up 4.5% and is trading above the critical $1,900 level. However, according to the Australia and New Zealand Banking Group (ANZ), the precious metal must continue to settle above this psychologically important level for the rally to continue. Bank of America (BofA) says that gold will take an important place in portfolios in the next three years.
Gold made a good move, but…
After its decline last year, gold has finally made its move. In fact, many analysts are looking for new record levels this year with the cooling of inflation and expectations of the Fed pivot. ANZ said in its report on Monday that gold is a precaution against the slowdown in 2023. “We expect gold to stay in favor as inflation recedes and interest rates approach their peak,” ANZ said. “Amid the Fed’s most aggressive monetary tightening since 1980, prices have rebounded strongly after last year’s correction.”
The bank says that among the factors supporting gold as an asset in 2023 are a pause in the Fed’s interest rate cycle, recession risks, a weak US dollar, high geopolitical risks and strong physical demand. However, the bank’s strategists Daniel Hynes and Soni Kumari note that in the short term, gold risks a correction due to the technical setup. Analysts make the following assessment:
The recent rally appears vulnerable to price correction, largely driven by expectations that the Fed will dovish. Any disappointment on the monetary policy front could cause prices to correct in the short term. We keep our 12-month price target fixed at $1,900.
This level is critical for the continuation of the momentum.
Gold rallied to $1,918 after surging above $1,900, while the yellow metal is trading well above its 200-day moving average. Analysts point out the following levels:
To sustain this momentum, prices must continue to settle above $1,900. We believe that the macro environment is not supportive enough to sustain the current price level. We noticed an ascending wedge formation on the daily technical chart. If prices drop from the current levels to the $1,870-1,900 range, we expect the trend to reverse. Below $1,800 confirms the price drop to $1,730.
Investment and physical demand will support gold price
All eyes will be on the outcome of the Federal Reserve monetary policy meeting on Feb. Markets are currently giving a 93.2% chance of a 25 bps increase, according to the CME FedWatch Tool. cryptocoin.com As you follow, the Fed increased the target policy rate by 50 bps at its December meeting, raising the upper limit to 4.5%. This was a modest increase after four consecutive 75 bps increases.
“The Fed will likely struggle to get inflation back to its 2% target range… it should hold the interest rate steady at 5% by 2024,” ANZ said in the report. This goes against the market’s expectations for a rate cut in late 2023 and leaves room for price correction. We believe that a synchronized relaxation cycle will begin from 2024,” he explains. ANZ is constructive on gold in the longer term. In the report,
Investment and physical demand are supportive for 2023. China’s reopening lays the groundwork for resilience in physical gold purchases. There is consensus that a recession is coming, with global economic growth falling to 2.4% in 2023. This will be the lowest level in the last four decades, excluding the first year of the GFC and Covid-19.
Gold performs better in times like these
There is also the risk of stagflation and in this scenario, there will be a more strategic positioning underneath. “Gold normally outperforms stocks before and during a crisis,” the report says. The weakening of the US dollar is something to watch closely in 2023. Analysts said, “After rising 29% since its mid-2021 low, we believe the dollar has peaked near 114 in Q4 2022 and recently dropped below the 200-day moving average. “Gold tends to yield an average of 18% 12-month returns after dollar peaks,” he says.
On the geopolitical front, demand for gold will continue due to the ongoing war in Ukraine, escalating tensions between the US and China over Taiwan, Iran’s nuclear program and North Korea’s unprecedented level of missile testing in 2022. ANZ makes the following assessment:
These upcoming geopolitical upheavals are potentially significant sources of economic and financial risk. Such a backdrop supports safe asset investment. Even central banks continue to increase their gold reserves to diversify their foreign exchange reserves. A higher geopolitical risk premium keeps gold prices stable.
China’s jewelry demand will be the main source of increased growth this year
Physical demand will also offset weak institutional demand in 2023, according to ANZ’s outlook. In this context, analysts make the following statement:
Individual investment is strong as stagflation and geopolitical risks encourage individual investors to buy. We estimate this will reach a multi-year high of more than 1,200 tonnes in 2022. Extraordinary purchases by central banks of some emerging market economies supported the purchase of physical gold In the third quarter of 2022, they made a record purchase of 399 tons. China’s jewelry demand will be the main source of increased growth this year.
Yellow metal will be a strong portfolio diversifier
Gold investors have been doing a lot of ‘soul seeking’ over the past two and a half years. According to BofA, however, gold will take a prominent place in portfolios over the next three years. The precious metal ended the year flat and has largely traded down and sideways since hitting these new record highs in 2020. But that is finally changing. Michael Widmer, commodity strategist at Bofa, comments:
Interest in gold has been muted in recent quarters compared to other asset classes. Because a stronger dollar offered no incentive to increase investment in the yellow metal. These factors, among others, caused some soul searching among market participants. However, we think it’s premature to call gold’s demise.
The macro outlook for gold turns bullish in 2023. It will also last until at least 2026. Citing several drivers, Widmer states:
First, real gold miners are increasingly debating the merits of turning it into copper. Also, data from our peers in equity research confirms that some senior gold miners are into base metals. However, a look at the income slump shows that gold will hold its ground until at least 2026. Second, the macro backdrop surrounds the bullish gold. Our analysis of a longer-term perspective space confirms that the yellow metal can be a powerful portfolio diversifier.
Gold and Bitcoin follow very different trajectories
Widmer also says that gold and Bitcoin follow very different trajectories. At this point he points out that it is essentially unrelated. That is, he argues against previous arguments that Bitcoin diverted investors’ attention from gold. In this context, Widmer makes the following statement:
Gold and cryptocurrencies sometimes seem to compete for investor attention. Of course, both crypto and gold can be a means of payment, a store of value. As the world becomes multipolar, the second point is important for central banks, especially emerging markets. Up to this point, in the escalation of the war in Ukraine, the Central Bank of Russia reduced its dollar holdings and at the same time increased its purchase of gold.
