Outlook for Gold: Can the Precious Metal Regain Power?

FBS Analysts

Gold set an all-time high at $2070 on March 08, 2022, when the price skyrocketed amid investors’ worries about the military conflict in Eastern Europe.

Since then the precious metal lost 15%. In October, the price fell to two-year lows around $1615. However, it recovered later. Currently, gold is trading between the 200- and 100-week moving averages as investors are waiting for significant news.

The yellow metal price has a few large drivers for investors to watch for at the end of 2022 – beginning of 2023. Among them are:

 

  • Geopolitical concerns.
  • The strength of the US dollar.
  • Inflation
  • Central banks’ interest rates.
  • A possibility of the upcoming recession in major economies.

Geopolitics

2022 saw one of the most significant geopolitical shocks following the invasion of Ukraine by Russia. The sanctions placed on Russia put pressure on the global economy and push gas prices to new highs. Europe is facing a difficult winter or energy rationing that may damage the industrial output of key countries like Germany.

Unfortunately, there appears to be no end to the conflict. Investors are concerned about further escalation, which could spill beyond economic sanctions into a more serious war. The invasion was a massive driver of the gold price earlier in 2022 and, without a doubt, be a key impact on the gold price in 2023.

Beyond Russia, a possible military conflict between China and Taiwan remains a key geopolitical issue the world is watching. If China takes military action on the island, the US and other countries might respond, causing another dump of the global economy. Investors are, therefore, watching closely for any potential escalation in Ukraine and Taiwan, which could have a solid impact on the gold price.

Global economic condition

Inflation has been the main driver for gold prices since the March 2020 Covid-19 dump. Major central banks turned to ultra-dovish monetary policy to save the global economy from collapse, printing money and purchasing assets on their balances (QE). As a result, the risk of inflation growth increased, making “smart money” choose gold as a safe-haven asset to pull through the upcoming inflation growth.

Since the beginning of 2022, the central banks have changed their monetary policy course to ultra-hawkish as inflation, measured by the Consumer Price Index, has finally spiked well above the normal targets. In the United States, it has reached its peak with a 9.1% year-to-year gain in July, declining to 7.7% in November. Meanwhile, in Germany and Great Britain, inflation remains at  40-year highs with 10.4% and 11.1% year-to-year change as of November, respectively.

Such numbers hold the gold price above $1600 even though the central banks raised the interest rates to the highest levels for the past decade. The Federal Reserve, for example, increased the federal funds rate to 4% at the November meeting, with another 50-basis-point move expected in December. At the same time, the key rate in Great Britain and European Union reached 3% and 2%, respectively, with more hawkish steps ahead expected.

High-interest rates are generally seen as a negative for gold as a non-yielding asset. However, high inflation is usually seen as a positive factor for gold which acts as a hedge against inflation.

According to this, until inflation cools down, gold will stay in a wide range, pressed with the central banks’ hawkish steps and supported by inflation spikes.

Risk of recession

Persistently high inflation is a serious risk to any economy as it can gain a foothold at this level. In this case, central banks will have to act even tougher, risking sending the economy into recession.

Nowadays, many economists predict that during 2023, the major economies will turn into a recession phase. Those economists are comparing the US 2-year and 10-year bond yields. Usually, the 2-year bond yields are lower than the 10-year bond yields. However, as of November 2022, the ratio inverted and hit the 1981 low, meaning that the market considers short-term investments riskier than longer-term ones.

The same situation happened before 1984, 2000, and 2008 financial crises. Historically, a recession in the US economy did not occur during the deepening of the inversion but after the yield curve began reverting to 0.

If a recession happens, the capital will flow from the risk assets, such as stocks and crypto, toward the safe-haven assets, such as gold and USD.

In the past, gold prices and recessions have had an inverse relationship. When the economy weakens, gold price usually goes up. During the last three recessions, 2020, 2007, and 2001, the price of gold increased while the value of the S&P 500 decreased.

It has happened because, for the past two decades, during recessions, the central banks have been supporting economies with key rate cuts and quantitative easing (purchase of external debt), causing global inflation growth.

This time will not be an exception, especially ahead of the 2024 US presidential elections. The stock market usually follows the M2 money supply indicator. In other words, the Federal Reserve will have to print more money to boost stocks and the economy.

Thus, gold will most likely increase in value in the long term. The best time for gold purchases is the extremum of an economic recession when the central banks reverse their policies and begin supporting economies with low-interest rates and additional money supply. At such moments, big money purchases the yellow metal, and its price goes up.

Conclusion

Two possible factors for the yellow metal price explosion are geopolitics and major banks’ monetary policy. If any military conflict escalates, the yellow metal might make a huge short-term impulse toward the 2050.00 resistance level.

However, for sustainable growth in the long term, central banks must start stimulating economies. Currently, the regulators have only one primary target – defeating inflation. Until it falls, the banks will raise rates and cut balances, pressing the yellow metal. However, as soon as the regulators change their rhetoric and reverse their monetary policy, gold will gain bullish momentum.

Thus, we suggest paying attention to the news and governors’ speeches to discover the moment of the XAUUSD global reversal.

Technical analysis

XAUUSD, Weekly timeframe

On the weekly timeframe, the price has formed a bullish flag pattern. If the price breaks through the 1950.00 level (upper pattern’s border), it will move to 2050.00 and 2300.00.

However, if XAUUSD loses the lower border of the pattern, it might fall to 1540.00, 1450.00, and 1370.00.

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