Gold Price Fluctuations and 2023 Forecast
Gold has recently been on a tear, with various triggers pushing prices close to historic highs. Gold’s price has grown by around 20% in the last six months, to more than $2,000 per ounce. This is quite close to gold’s all-time high of $2,075.
Gold has captivated people for thousands of years, and it has served as a reliable store of value since antiquity. Gold can now generate substantial returns—but only when market conditions are favourable.
According to some experts, gold’s recent rise is just getting started. Others are sceptical of gold’s ability to provide further price gains.
What is driving up gold prices?
The outlook for interest rates has been one of the most important triggers for gold in 2023.
For more than a year, the Federal Reserve has aggressively raised interest rates in its continuous campaign to reduce inflation. Finally, the most recent inflation figures indicate that the Fed is making progress in bringing prices under control.
Furthermore, an unanticipated banking crisis in March constricted the credit market, potentially cooling the economy and slowing inflation.
Investors now expect the Fed to suspend rate hikes and shift to rate reduction sooner than previously expected. They believe there is a roughly 70% possibility of another quarter-point Fed rate hike in May and a 56% chance of a rate drop by July.
Gold is commonly regarded as an alternative universal currency, yet it generates no interest payments or other economic flows. As a result, it has typically correlated negatively with interest rates. This has recently been the case, as gold prices have risen to new highs as the prognosis for interest rates has deteriorated.
The yellow metal is also viewed as a safe haven in the event that rising interest rates cause a recession and reduce corporate earnings.
The gold standard and the US dollar
Gold has historically had a negative association with the US currency. Because gold is usually valued in dollars, a weak dollar means that investors must pay more for the same amount of gold.
There are other psychological elements that contribute to gold’s unfavourable connection with the US currency. Many investors believe that gold has an unchangeable, intrinsic worth due to its utility and distinctive physical features, such as its beauty and softness.
When investors lose faith in fiat currencies, they turn to gold as a safe haven investment. The failure of Silicon Valley Bank and a few other institutions in March shook faith in the US financial system and the dollar, boosting gold demand.
So far in 2023, the negative link between gold and the US dollar has held. The US Dollar Index (DXY) is down 1.3% year to date, while gold has risen more than 10%. If the Fed moves to ease monetary policy in the second half of the year, the dollar may face additional pressure.
Indeed, a major investment firm recently forecasted that the dollar might fall another 10% to 15% by mid-2024, a potentially massive decline for the world’s reserve currency.
Gold Price Forecast
Gold hit an all-time high of $2,075 in August 2020. However, an increasing number of analysts believe the precious metal will outperform its previous high in 2023.
Some analysts previously predicted that a Fed pivot would cause the US currency to fall and bond yields to fall, bringing gold prices up to between $2,500 and $2,600 per troy ounce.
Other asset managers believe gold will be even more valuable in 2023. Some investing specialists predicted in December that minor worldwide recessions in 2023 may propel gold prices as high as $4,000 per ounce by the end of the year.
According to Bank of America experts, a weaker US currency would drive up gold prices by the end of 2023.
According to Bank of America, the annual average price will be $2,009/oz. They believe the yellow metal will consolidate in the coming months before resuming its ascent to a new all-time high.
The commodities team at Bank of America predicts that the price of gold per ounce will hit $2,200 in the fourth quarter.
Supply and Demand for Gold
Gold prices are also influenced by fundamental supply-and-demand dynamics, and gold is in high demand. According to the World Gold Council, global gold consumption will climb 18% to 4,741 tonnes in 2022.
The single largest global driver of physical gold demand is jewellery. Central banks all throughout the world buy and hold gold in order to diversify their holdings. Furthermore, gold is employed in industrial and electrical devices and processes.
Investors also contribute directly to the demand for gold bars, coins, and metals. Physically backed gold ETFs must regularly increase their gold holdings.
If global investor interest in gold begins to rise (as it often does when price momentum goes sharply positive), net ETF demand might be the catalyst that propels the yellow metal’s price further higher.
Is Gold an Excellent Investment?
Wealth managers and investment advisors frequently include a small amount of gold (3-5%) in a diversified investment portfolio. Gold has historically had a low or even negative correlation with equities and bonds, which helps to mitigate losses during market downturns. Gold prices, for example, rose 0.4% in 2022, while the S&P 500 fell 19.4%.
Between 1971 and 2022, gold generated an average yearly return of 7.7%, well outperforming the dollar’s nominal return of 4.2%.
While a small amount of gold can help diversify a portfolio and decrease risk, there are numerous reasons not to go all-in on gold.
Gold has consistently lagged behind the performance of the S&P 500, which has provided an annual return of 10.2% on average since 1971. Furthermore, gold does not pay dividends, collect interest, or produce cash flow or income.
How to Make a Gold Investment
You can invest in gold in a variety of ways.
Some people prefer to hold actual gold in the form of bars, coins, or jewellery. Buying real gold is a good long-term investment plan, but trading it in the short and medium term can be tricky and expensive.
Gold futures and options contracts can also be traded by investors, but these derivatives can be confusing and exceedingly hazardous for investors who do not have a thorough understanding of the derivatives markets.
Gold stocks, such as gold miners and gold streaming or royalty equities, are available to investors. Profitability of gold mining companies rises when gold prices climb, but gold mining stocks are significantly more unpredictable than gold prices themselves.
Finally, investors in gold can purchase gold ETFs, trusts, or mutual funds. Gold mutual funds invest in mining company equities as well as real gold.
Investors seeking a more aggressive approach to gold can acquire leveraged gold ETFs, but these funds are not intended to be long-term investments and tend to significantly trail the underlying price of gold over time.
Note: When it comes to money matters and your finances, you should always seek the advice of financial professionals. Investing and money management carries the risk of loss, so it is vital that you get well-informed, professional financial planning from investment professionals.