Gold Prices to Keep Surging on Expected Rate-Hike Slowdown

Gold prices rose to the highest level in more than eight months as investors continue to bet that the U.S. central bank would slow the pace of interest rate hikes after the latest consumer price index (CPI) print showed that inflation cooled to 6.5% in December.

Lower interest rates mean weaker returns on interest-bearing assets, which could push investors toward zero-yield gold, which is traditionally used as a safeguard against inflation.

"We're looking at this as more of a slight pullback within our sideways-to-higher trend. We believe the combination of the weaker dollar and sticky inflation concerns continues to support our underlying positive environment," said David Meger, director of metals trading at High Ridge Futures.

Bullish Catalysts Ahead

Following the latest CPI report, markets are now pricing a 90.6% chance of a 25 basis points (bps) interest rate hike at the Federal Reserve’s policy meeting in February. The markets are also expecting the rates to peak at 4.94% in June, compared to the Fed’s expectations of more than 5% going into 2024.

Meanwhile, high interest rates have reduced the appeal of non-yielding gold while driving returns on government bonds and pushing the US dollar to a 2-decade high last year. Jane Fraser, CEO of Citigroup (NYSE:C) said the Fed could loosen its monetary policy in late spring or early summer.

Elsewhere, China saw its gross domestic product (GDP) growth decline in 2022, however, the World Economic Forum (WEF) expects China’s reopening to drive global growth more than previously anticipated. Generally, Chinese investors ramp up their gold purchases ahead of the Lunar New Year holidays, which start later this week.

Carsten Menke, head of Next Generation Research at Julius Baer, said:

"The fact that the recent gold rally started to lose steam does not come unexpectedly as it was lacking the buy-in from investors. That said, a (correction) is unlikely to be massive because market consensus still calls for a less aggressive Fed going forward."

On the other hand, Menke expects to see gold prices on a softer footing amid waning investment demand. An increase in demand will play a key role in the bullion’s future trajectory, Menke added.

Gold Price Outlook for 2023

Gold prices returned to trade above the $1,900 threshold on Wednesday following the U.S. dollar’s retreat from its session highs and expectations of a more dovish approach by the Fed. The yellow metal previously printed its highest levels since April 2022.

Spot prices of gold have increased around 18% since November as record-high inflation cooled down and odds for less aggressive interest rate hikes increased. A series of jumbo interest rate increases battered gold prices in 2022, pushing them down to $1,613.60 in September from a high of $2,069.89 in March.

Some analysts think that a slowdown in Fed’s interest rate could boost gold prices as high as above $2,000 an ounce in 2023, though with some turbulence. Goldman Sachs (NYSE:GS) analysts see gold prices trending around $1,950 an ounce this year.

Similarly, the steep decline in the world’s reserve currency and bond yields could “become macro tailwinds for the yellow metal, pushing gold above $2,000 an ounce in the coming months," said analysts at Bank of America (NYSE:BAC).

WisdomTree analyst Nitesh Shah said waning pressure from the greenback and bonds has encouraged investors to buy gold as a hedge against inflation and economic turmoil. The long term prospects of gold have made the commodity a common asset found in IRAs and other retirement-focused investing accounts. By the end of 2023 however, Shah believes gold prices could easily surge above $2,100 an ounce.

The World Gold Council (WGC) says analysts are expecting global central banks to continue amassing bullion after purchasing a record amount of the precious metal in the first nine months of 2022.

ANZ analysts expect retail investors to continue buying gold bars and coins following a stronger-than-expected economic reopening in China, though the bullion prices may have spiked too much too quickly in the short term, meaning a correction could be expected.

"Should prices fall from current levels to the $1,870–1,900 an ounce range, we expect the (upward) trend to reverse," ANZ analysts said. They also see the bullion slipping to $1,730 if it drops below the $1,800 threshold.

Summary

Gold prices are trading above $1,900 an ounce this week as the post-October rally sustains. Investors are increasingly betting that central banks will relent from their hawkish policy stance and ultimately pay the way for zero-yielding assets, like gold, to outperform. Analysts believe gold prices could exceed $2,000 an ounce this year, which would mark the first breach of this psychologically important level since March 2020.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.