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• Gold was not an effective hedge against inflation in 2022
• RBC expects gold prices to rise again in 2023 and 2024
• Falling interest rates and a weaker US dollar could boost gold
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At the turn of the year, many investors are wondering how they can invest their money in view of the weak stock market development and persistently high inflation. Again and again one comes across experts who recommend buying gold. But is it worth investing in gold in 2023? The opinions of the experts go in different directions. The Royal Bank of Canada (RBC) would answer this question in the affirmative. Looking at the recent past, gold prices could benefit from a shift in macro factors going forward, RBC says.
The recent turmoil in gold prices
The price of gold has experienced some turbulence since the start of the corona pandemic in early 2020. Initially, as a result of the uncertainties surrounding the virus, it rose to over 2,000 US dollars per ounce by summer 2020. In 2022, the geopolitical uncertainties in the wake of the Ukraine war initially gave gold a boost, but from March the price of the precious metal fell significantly: Rising interest rates and the strong US dollar increased the opportunity costs of a gold investment, and demand for gold decreased accordingly gradually. On November 3, 2022, the low for the year was marked at 1,630.90 US dollars. This was followed by a rapid recovery rally. The cheap price of gold attracted many bargain hunters who pushed the yellow metal back above $1,800. Gold is currently priced at $1,838 (as of January 4, 2023), about the same as it was in early January 2022 – so last year has yielded a nominal zero return for long-term gold investors despite the ups and downs. Gold was therefore unable to compensate for the loss of purchasing power caused by inflation, at least this year.
RBC sees good entry point
However, the price of gold could benefit from a sustained trend reversal in the coming months. RBC expects a price level of USD 1,890 per ounce of gold in the last quarter of 2023, and even USD 2,138 in the best-case scenario. RBC commodities expert Christopher Louney told Kitco News that there will be “many buying opportunities” at the start of the new year. Gold can increasingly free itself from the grip of rising interest rates and dollar strength and will therefore strive north.
RBC describes gold as a strategic rather than a tactical asset in the current environment. “We recommend it as a risk overlay, particularly in the face of economic and geopolitical risks, and as a long-term store of value,” the report said. “We cite Russia’s ongoing war in Ukraine, US-China tensions and other risks related to resource nationalism, de-globalization and broader trade tensions as the world continues to face high inflation and related economic challenges.” These crisis phenomena will increase the attractiveness of gold as a safe haven in the coming months, says Lourney.
Falling interest rates and weaker dollar could help gold prices
There are three key variables that are likely to drive gold prices going forward: inflation, interest rates and the relative strength of the US dollar. Inflation can affect the price of gold as gold is often used as a hedge against inflation. If higher inflation is expected in the future, demand for gold can increase, leading to higher prices. This is because gold is a physical asset that can neither be created nor destroyed, so it is expected to retain its value over time. In contrast, inflation can erode the value of fiat money, making gold a more attractive option for wealth preservation.
Interest rates can also affect gold prices, as higher interest rates can make gold less attractive to investors. That’s because gold doesn’t have a yield, so investors may be more inclined to invest in assets that offer a higher yield, like stocks or bonds. As a result, an increase in interest rates can lead to a decrease in demand for gold and a corresponding drop in price – this happened over the course of the past year 2022. According to the World Gold Council (WGC), the gold price is likely to be heavily influenced by the Fed’s interest rate policy in the new year as well .
The value of the US dollar can also affect the price of gold, as gold is often bought and sold in dollars. If the dollar falls in value, the price of gold can rise as it becomes cheaper for foreign buyers to purchase the precious metal. Conversely, if the value of the dollar rises, the price of gold can fall as gold then becomes more expensive for non-US buyers. In addition, the US dollar is also considered a safe haven and is therefore in direct competition with gold.
Will there soon be a dream scenario for gold investors?
As a result, it is indeed conceivable that future developments could play into the hands of gold investors. If inflation should actually decrease in 2023 and 2024 – which many price indicators are pointing to – the international central banks such as the Fed or the ECB should also lower the key interest rates again. As a result, competition from bonds, which, like gold, are viewed as safe havens, should decrease. The RBC also expects a lively gold price rally as soon as the US Federal Reserve signals a peak in interest rates. “Our economic and rates strategy team sees the last rate hike the Fed in March,” says Lourney. After that, prices will start to rise: “The calculation will change as soon as the last rate hike is due. From there we see further easing in macro factors.”
The price of gold should also receive a price boost from a weakness in the US dollar. The Fed was seen as an international pioneer in raising the key interest rate and recently carried it out much more offensively than other central banks, which helped the US dollar to soar. This is likely to change in the coming months, however, since the Fed’s sharpest rate hikes are already over. The dollar has already lost strength as a result. But whether the dream scenario of gold investors – geopolitical uncertainties, falling inflation and the associated low interest rates and a weaker US dollar – will already materialize in 2023 depends on many open variables. At least for 2024, the RBC expects a new interest rate cycle that could help the price of gold to a new record high.
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