Bullion gearing up to rally in 2023

WITH inflation continuously raging and gold prices failing to keep up, the obvious question on gold’s performance is whether its reputation as the “perfect hedge against Inflation” will falter. Historically, gold has always proven to be a safe-haven when equities and other risky assets like crypto come crashing down in rising-inflationary scenarios.

We have moved from an era of concern that rising inflation might cripple the economic growth, to an era of fears that rising rates might orchestrate a potential recession. The markets are pricing recession, and coupled with the drop in the dollar, it brightens the inherent appeal of investing in gold as the Federal Reserve begins softening with milder hikes.

Mending ground below bullion prices with historic support zone around US$1,620 per ounce were tested multiple times between September and October. The rebound and rally of over US$200 was facilitated by the tumble in dollar index, which has lost over 8 per cent since October. The dollar index was further supported by a successful gauge of monetary tightening, milder-than-expected US consumer price index numbers of 7.1 per cent in November.

Central banks across the globe have been on a buying spree, gobbling yellow metal at record-high speed, shunning away from the dependencies on forex reserves, in a meaningful way. Officially, central banks were net buyers of gold in the third quarter of 2022 with over 400 tonnes, amounting to nearly US$20 billion, the highest in over half a century. This is very bullish for gold prices, pushing bullion to test 200-DMA of US$1,818 per ounce.

Looking at the daily intra-day price chart for gold, it breached the downward trend line (black) joining tops from March 2022 to October 2022, for the first time in November. This indicated a change in trend on the upside. Additionally, there might be a reverse head and shoulders in the making, with triple bottom at level of US$1,620 per ounce being the head and low of US$1,678 per ounce on Jul 21 being the first shoulder. We might get a clear right-side shoulder formation in coming weeks, by which time we may witness a big rally on upside with target levels of US$1,890 and US$1,940 per ounce.

If gold continues to hover around current levels of US$1,800, 2022 will be the second straight negative year for yellow metal prices. However, despite a negative of 1.75 per cent return, gold still tops the chart of performing assets in 2022.

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In response to global headwinds on equities and growing fears of possible economic weakening, leading to cynical recession, I expect to see movement out of balanced portfolios and risky assets to flow into bullion, the safe haven in times of crisis.

The writer is a market analyst at Phillip Nova