After a difficult year marked by significant volatility and uncertainty, driven in part by the ongoing COVID-19 pandemic, the gold market is ending 2022 on an upswing in roughly neutral territory at around $1,800 an ounce.
One key factor that impacted the economic performance of gold and commodities in 2022 is the overall state of the global economy. The COVID-19 pandemic led to a sharp contraction in global economic activity, with many countries experiencing deep recessions. This resulted in a decrease in demand for commodities, as industries and businesses scaled back their production and investments in response to the downturn.
However, monetary and fiscal policy responses to the pandemic largely influenced the outlook for gold and commodities in 2022. Many central banks around the world implemented accommodative monetary policies, including low interest rates, in an effort to support economic activity. This then led to concerns about inflation and the potential for debasement of fiat currencies, which supported demand for gold and other commodities as a store of value.
The supply and demand dynamics for gold and commodities also played a role in determining their economic performance in 2022. For example, supply chain disruptions and transportation difficulties caused by the pandemic disrupted the flow of many commodities, leading to large price fluctuations. On the demand side, the shift to remote work and online shopping led to increased demand for some commodities, such as copper and lumber, while the decrease in travel and tourism led to a decline in demand for others, such as oil and gas.
Looking ahead to 2023, the state of gold and commodities is uncertain and will depend on a variety of factors.
If the global economy continues to recover from the pandemic-induced recession, it could lead to a decrease in demand for gold as a safe haven asset and a corresponding decline in prices. Conversely , if the recovery stalls or if there are renewed outbreaks of the virus, it could lead to increased demand for gold as a hedge against economic instability.
In addition, the potential for further monetary policy changes by central banks will also play a role, through its impact on inflation expectations, in determining gold’s direction in 2023.
If central banks continue to signal that they will take steps to curb inflation by raising rates, this usually leads to a decrease in demand for gold.
Increased interest rates tend to have a negative impact on the price of gold. When central banks raise rates, it makes other assets, such as bonds, more attractive compared to gold, as they offer a higher yield. Gold’s demand as an investment then decreases, lowering prices.
Note that the relationship between interest rates and the price of gold is driven in part by the opportunity cost of holding gold. Gold does not pay any interest or dividends, so when the return on other assets like bonds increases due to higher interest rates, obviously investors are more attracted.
On the other hand, if central banks decide to start adopting accommodative monetary policies, such as large-scale asset purchases or low interest rates, it can lead to concerns about future inflation. This makes investors seek out assets, like gold, that are perceived as a hedge against inflation, leading to increased demand and higher prices.
While the Federal Reserve continues to take a firm stance on inflation, economists note that the central bank is closer to the end of its tightening cycle, which could be good for gold.
Bank of America looks for the Federal Reserve to end its tightening cycle in March and sees the first rate cut by the end of 2023.
Along with Bank of America, Saxo Bank is one of the most optimistic on gold ahead of the new year. Ole Hansen, head of commodity strategy at the Danish Bank, said that he doesn't expect the Federal Reserve to bring inflation under control.
"The risk of a recession and the FOMC hiking into economic weakness – potentially without succeeding in getting inflation under control - continues to strengthen the upside risk for investment metals in 2023," he said.
Although inflation is expected to be down from the 2022 highs, it is still likely to remain elevated through 2023.
Gold is on track to end the year with a gain of less than 2%, making it one of the top-performing assets, just behind the U.S. dollar.
Along with that, and although investment demand was lackluster through 2022, the precious metal saw historic demand from central banks.
As of the end of the third quarter, central banks bought 673 tonnes of gold, the most since 1967. At the start of December, China, for the first time in three years, reported that it bought 32 tonnes of gold in November.
Juan Carlos Artigas, global head of research at the World Gold Council, said in a recent interview with Kitco News that although this year's purchases have been extremely elevated, it's a continuation of a trend that’s been building for more than a decade.
While it is expected that gold will continue to outperform most asset classes in the coming year, major banks and commodity analysts are predicting that there will not be a significant increase in gold prices until the latter half of the year.
Currently, gold prices are expected to remain around $1,800 an ounce, in neutral territory.
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