Gold moved opposite to the dollar in 2022. Since the greenback has been strengthening against major currencies, the gold did not perform very well and reached a low of USD1,618 (COMEX Gold Futures) before recovering by the end of the year. However, things might change in 2023 and there are several important factors supporting the gold price. We might expect gold to hit a record high this year.
● Dollar weakness
Strong dollar pressed gold in 2022, but we expect the greenback will be on the defensive in 2023, since the end of the hiking cycle will not widen the interest rate differential further. Recession will also likely press the dollar if there is any expectation of an interest rate cut. I expect the dollar index might retreat to 94, which will give a strong boost to gold.
● Fed hike cycle ends in Q1
Even though the terminal rate will be 5.0%-5.25%, I expect that the Fed will end the hiking cycle by Q1 via delivering a 50 bp hike in February followed by a 25bp hike in March. High interest rate is negative to gold since gold doesn’t bear any interest. A full stop of the interest rate hikes should eliminate the pressure on gold we experienced in 2022.
● Recession fears bring risk aversion demand
Since we will likely have a recession in 2023, the risk aversion demand will help gold. Safe-haven flow due to uncertainty will be the major source of rally for gold. The deeper the recession, the higher the gold will rise. Historically, gold will outperform in the event of a recession.
● Stronger demand from China
We might expect more demand from China in 2023, as the economy finally reopened and people’s lives will eventually be back to normal after 3 years of covid zero restriction. In fact, China’s gold demand in Q3 had already improved. In addition to higher jewellery demand, gold will also be a good hedge against any potential debt or economic crisis.
● Lower inflation will not hurt gold
Inflation is usually not a good indicator to trade gold, since the monetary policy affected by inflation will dominate instead, unless we have runaway inflation that might boost safe-haven demand, which is not the case right now since inflation has peaked. Buying or selling gold because of higher or lower inflation is usually not a wise bet.
● Technical breakthrough
Gold formed a strong base during the Oct/Nov period in 2022, and the breakthrough of the downtrend was a strong reversal signal. The gold is on the uptrend right now, and the first important resistance is around 1,880, followed by a physiological resistance of 2,000 before challenging record high. Strategy is to accumulate positions around 1,850 and wait for a record high. Stop loss the position if gold retreats to 1,730.
Disclaimers
Above information are for illustration only and there is no guarantee on the accuracy of the information. They should not be treated as investment recommendations or advices.
Comments