Rising inflation, expectations of easier money could boost gold prices in 2023: analysts

[LONDON] The price of gold has soared by roughly 15 per cent since early November last year to US$1,924 an ounce today due to large purchases by global central banks, this month’s Chinese New Year celebrations and a minor weakening of the US dollar.

It’s still anyone’s guess at this point if gold could match or even surpass its all-time high of US$2,075 an ounce that was recorded in August 2020. Analysts say much will depend on how the greenback fares in the coming years, as well as how the ongoing Russia-Ukraine war and the numerous conflicts in the Middle East pan out this year, among other factors.

There are some risks for gold bulls, who could cut their positions quickly if the outlook remains uncertain. Investors in gold exchange-traded funds (ETFs) are holding as much as 3,462 tonnes of the precious metal and they tend to get jittery when the price shows signs of trending downwards. When the price of gold was relatively depressed in September and October last year, for example, they dumped 227 tonnes of gold.

Despite these concerns, analysts and traders do not expect any major price decline in 2023. Indeed, they predict that rising inflation and expectations of easier money and a fall in interest rates during a global recession could weaken the US dollar and boost the price of gold in the process.

“We expect the US dollar to weaken further and bond yields to fall, but gold appears to have priced in much of these risks already,” says Suki Cooper, a precious metals analyst at Standard Chartered.

But given the extent of central bank bargain-hunting and the expectation that jewellery demand will remain buoyant in India and increase in China this year, she noted that any price correction was likely to be limited.

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The recent speculative and investment buying contrasts sharply with the pessimism seen between September and November last year when gold traded at between US$1,600 and US$1,700 an ounce. In the third quarter of last year, managed funds had sold gold short with the aim of buying it back at a lower price.

Fortunately for gold buffs, central banks took advantage of the lower prices and purchased 400 tonnes of gold in the third quarter of last year. Total purchases from January to November 2022 reached 754 tonnes, the highest by central banks in a calendar year since 1967. That was the year before the fixed price of US$35 an ounce was abandoned and the free bullion market began.

According to latest data, the main buyers of gold last year were Russia, China, India, Turkey, Uzbekistan and Kazakhstan. China bought steadily in 2022, raising its disclosed official holdings to 2,010 tonnes.

“As global oil contracts increasingly use the yuan, gold may return as a settlement medium via yuan-gold convertibility,” said Paul Wong, a market strategist at Sprott, a global asset manager. “The need to build sufficient gold for this facilitation is another possible reason for the massive surge in gold imports from China in 2022 and the early days of 2023.”

Wong noted that gold may become more attractive than the US dollar for countries aligned to China. Yuan-gold convertibility would help them avoid the risks of sanctions from the West, he said.

In a recent report, analysts at Swiss bank UBS cited three tailwinds for gold in 2023 – more central banks are diversifying into gold, the proportion of institutional investor gold holdings relative to overall assets remains light, and the fact that the US Federal Reserve will likely cut rates again in the second quarter of this year.