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How High Can The Gold Price Rally In 2023?

Leading banks, rating agencies and consultancies see bright outlook for the precious metal in 2023 and said prices will sustain an upward trend in the second half of the year

Gold is expected to continue a steady upward trend in the second half of this year on persistent demand from investors, central banks, and general buyers in the wake of economic uncertainty, fear of recession and geopolitical situation, experts say.

Gold, a popular commodity in world’s most populated nations and the biggest buyers — India and China — is seen as a safe-haven asset, which rises during times of economic uncertainty, and is used by some investors as a hedge against inflation. It is a highly influential commodity in the global economy, which is likely to face an economic slowdown and recession.

Referring to the latest World Gold Council report, analysts and market experts said continued central demand, event risk hedging and a stable US dollar and interest rates are some of the key factors which pushed the gold prices up in the first half of 2023.

The yellow metal, which rose 5.4 per cent in first half at $1,912 per ounce, not only contributed positive returns to investor portfolio but it also helped dampen volatility throughout the first half, especially during the mini-banking crisis in March when it crossed $2,000 mark after the Silicon Valley Bank collapse.

The precious metal continued the bullish momentum, reaching the peak of $2,067 on May 4 as concerns about the US debt ceiling combined with the US Federal Reserve's signalling a pause of tightening fuelled demand for gold. It also received support from the wider economic pessimism and fears of the upcoming recession.

Central banks’ demand for the yellow metal also remained unquenched, contributing an impressive 228 tonnes to global reserves in the first quarter of 2023, according to the World Gold Council, with Singapore, China, and turkey among the biggest buyers.

Gold outlook

Leading banks, rating agencies and consultancies see bright outlook for the precious metal in 2023 and said prices will sustain an upward trend in the second half of the year.

Fitch Solutions expects that gold prices will average $1,950 per ounce this year while ABN Amro Group estimates the precious metal to average at $1,900 per ounce in 2023 and rise to $1,950 by end of 2024.

“March 2023 banking turmoil has triggered a rush to safety among investors fearing recession while market expectations for continued and aggressive rate hikes by the US Fed have now collapsed,” according to Fitch Solutions.

ANZ Research analysts are more bullish and project gold to be trading at around $2,100 by the close of 2023, accelerating to $2,200 by September 2024.

The World Bank’s long-term gold price forecast shows that gold prices will finish 2023 at $1,900 and then drop to $1,750 by the end of 2024. Gold prices hovered near a one-month high in mid-July at 1,958.79 per ounce while US gold futures hit $1,963.80.

Why prices to go up

Shamlal Ahamed, managing director for International Operations at Malabar Gold & Diamonds, said the prevailing gold price during a certain period is governed by a host of socio-economic and political factors across the globe.

“Considering the historic trend in gold prices and market conditions, it is safe to assume that the gold price will only be going up in the near future,” he said.

“Owing to its ever-increasing value, ease of liquidity, tangibility as an asset and ornamental value, the demand for gold both as an asset and jewellery has constantly been on the rise among consumers of all age group, reiterating its status as a safe-haven investment,” he said.

Avoid volatility

To combat the volatility in prices and to provide customers with the best value for their money, he said Malabar Gold & Diamonds has introduced several advance schemes wherein customers can block the prevailing gold rate by paying a portion of the amount set aside for their jewellery purchase.

“If the gold price increases during their purchase, they can avail the blocked rate and if the price drops, they can draw mileage from the reduced rates. Customers can take advantage of the advance facility at any of our outlets or even through our mobile app and it is available 365 days a year,” he said.

Safe haven status

Joy Alukkas, chairman, Joyalukkas Group, said gold prices have historically shown resilience during recessions and market crashes, often acting as a safe haven for buyers.

“Take the example of the 2000 Dotcom Bubble, gold prices began a multi-year bull run. Also, in 2008 the global financial crisis saw gold prices initially decline but subsequently surge to new highs as central banks implemented quantitative easing measures. A similar trend noticed during the Covid -19 crisis,” he said.

“If the recession risk increases in the second half of 2023, gold investment could see greater upside,” he added.

Universal currency

Alukkas said gold is widely considered to be an alternative universal currency, but it does not earn any interest. As a result, it has historically had a negative correlation to interest rates.

“Gold also has a negative correlation historically to the US dollar. Because gold is typically priced in dollars, a weak dollar means gold buyers pay more for the same amount of gold. If the Fed begins to loosen its monetary policies in the second half of the year, the dollar could be pressured further,” he said.

In the first half of the year, Alukkas said gold increased by 5.4 per cent in US dollar — closing June at $1,912.25 per ounce. Referring to the market experts, he said the Federal Reserve is expected to raise its benchmark interest rate to a 5.25 per cent-5.5 per cent range.

Rising demand

To a question about key factors that will drive gold in second half, he said interest rates and the US dollar weakness will weigh on the gold price. “The main driving factor for gold in the second half is going to be Interest rate decision and weakness in the US dollar. Apart from that inflation, geopolitical and economic uncertainties, central bank policies, production and mining, market sentiment and investor behaviour also affect the price,” he said.

Referring to the World Gold Council, he said gold prices are also driven by basic supply-and-demand dynamics. "There is plenty of demand for gold. Global gold demand increased 18 per cent in 2022 to 4,741 tonnes,” according to the World Gold Council.

Upside with risks

The council also cautioned that the yellow metal could see greater upside if the global economy faces a serious threat of recession.

“An economic deterioration could be driven by a significant increase in defaults following tighter credit conditions or other unintended consequences of the high-rate environment. Historically, such periods have resulted in higher volatility, significant stock market pullbacks, and overall appetite for high quality, liquid assets such as gold,” it said.

On the flip side, the council said expectations of a soft landing — where a recession is avoided but monetary policy remains tight — could create headwinds for gold and result in disinvestment. “Given gold’s positive performance in first half, an investor unwind would need to be severe to result in the average 2023 gold price falling below $1,800 per ounce — its 2022 average,” according to the World Gold Council.

What affects gold price?

The US dollar, physical and investment demand for the precious metal, and the health of the global economy drive gold prices.

How much the gold price up in 2022?

In 2022, the price of gold stayed flat, increasing only slightly by two per cent.

Should I invest in gold?

The outlook for the gold price will depend on the strength of the US dollar and how monetary tightening affects the global economy, as well as developments in the banking industry. Buyers should do their own research to make informed trading decisions, always bearing in mind that past performance is no guarantee of future returns.

Is it a good time to buy gold?

Historical trends indicate that gold tends to surge during the first couple months of the year. The price cools down through the spring and summer, then takes off again in the fall. This means that on a historical basis, the best times to buy gold are early January, March and early April, or mid-June to early July.

Key factors for gold in 2023

— muzaffarrizvi@khaleejtimes.com