Outlook 2023: Gold poised to shine in new year post rollercoaster ride in 2022
Rollercoaster ride of gold in the tumultuous year of 2022 is probably going to end in a slight annual loss with Gold prices hovering around $1,810/Oz not far from 2021 close of $1,826. Still, mere statistics of comparative annual returns would not reflect the volatile journey the yellow metal has had throughout the year. However, gold looks well positioned to shine brightly in 2023 on stagflation and geopolitical risks as global economy faces enormous headwinds amid elevated inflation and high interest rates. Such a scenario would solidify position of gold as a reliable asset and a trustworthy store of value.
Gold almost touched $2,100/oz mark in the wake of Russia’s invasion on Ukraine in February 2022, but subsequently eased in later months as Central banks around the world decisively opted for aggressive monetary tightening policies in their battle against soaring inflation that hit multi-decade high. Gold prices slid roughly 25% from the record high of $2,075 (spot) to $1,615 (spot) level by November, and since then have recovered nearly 13%.
Gold may benefit on negative yields in the US and other major economies in near-term as despite sharp interest rate hikes by the major central banks, inflation and short-term inflation expectations continue to be elevated. The economic outlook of the key economies, which is already betraying dismal picture, may worsen alarmingly. Stagflation has historically been supportive of gold. US terminal rate, expected to be around 5%-5.25% in 2023, would crush the weakened housing sector further.
In a similar vein, employment scenario may lose its luster. Recession and weaker earnings have historically been often positive for gold. The US economy is likely to come under pressure in coming months, rate cut possibility would be the ultimate driver for gold rally. Another major factor that will support gold prices is the meltdown of cryptos in 2022, which has once again underscored gold’s universal value as a safe-haven asset.
Also read: Gold rate may hit 61,000
The central banks accelerated their gold buying in Q3 2022 to the highest pace in more than fifty years. In addition, China, the biggest gold consumer and with two years of stalled growth, may show pent up demand as Covid curbs are being relaxed.
Gold continues to command a hefty geopolitical risk premium as the Russia-Ukraine war continues without a sign of a truce in foreseeable future. With the threat of nuclear war looming large, stakes have been upped. Risk will come from an unexpected end to Russia-Ukraine war, and central banks refusing to let-off the rate hike pressure in case inflation proves to be stubborn. Investor should diversify their investment basket with 5-10% fund allocation to Gold. Overall, we expect the metal to make new highs in 2023.
The author, Mohammed Imran is Research Analyst at Sharekhan by BNP Paribas
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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