Few people think that in 2022 there will be such big shocks after 2 years of the pandemic that has caused many countries to close their borders, impose a series of blockade orders and disrupt global supply chains.
But the geopolitical turmoil caused by Russia's war in Ukraine and the energy crisis that followed it made the outlook for 2023 all the bleaker, pushing gold prices to an all-time high, surpassing the 2,000 marks. USD/troy ounce in March, as investors buy gold as a safe asset.
This is a development that has been predicted by gold experts before. However, the gold market is not so simple. Gold shined right in the year when interest rates were raised to curb inflation, causing institutional investors to sell gold and buy bonds because yields on government bonds were high and too attractive for them to miss.
Gold is currently trading at $1,780 per troy ounce, after the Fed raised interest rates from near zero to around 4.25-4.5%, including the most recent rate hike last week. The Bank of England and the European Central Bank (ECB) also raised interest rates. This pushed the gold metal price above the September low of $1,600 and the 2010s average of $1,350.
Christopher Louney, commodities strategist at RBC, calls this a "persistent tug-of-war" between the negative financial factors that are dragging gold prices down and gold's appeal as a safe-haven asset. in the context of risk or inflation.
But 2022 is coming to an end. What investors, including those looking to save, need to know what happens next. The Financial Times has reported notable signals in the gold market.
Redirect or not redirect?
For 2023, gold will go up or down depending on a range of factors ranging from central bank purchases to China's opening up of its economy, and geopolitical risks, including the war in Ukraine, the confrontation between the US and China over Taiwan, and tensions in the Middle East.
But the hottest debate right now is the interplay between inflation and central bank intervention.
"The biggest impact on gold prices is the Fed's interest rate policy and US real interest rates. It's all about the opportunity cost of owning gold," said Bernard Dahdah, veteran commodities analyst at Natixis, a French investment bank. "The big question is: will the Fed change course?"
Higher yields on US government bonds pushed the dollar higher, as investors sold bonds in other currencies to buy US Treasuries. This causes gold to no longer shine.
"It's one thing to hold gold when interest rates are zero, it's another to hold gold when interest rates are at 4%," said Giles Parkinson, managing director of global funds at Close Brothers Asset Management.
Investors are assessing the impact of the Fed's latest rate hike. Even if the Fed only raised interest rates by just 0.5 percentage points, followed by many increases of 0.75 percentage points, gold prices still fell after Fed Chairman Jerome Powell warned he could not guarantee that the Fed's forecast about the peak interest rate will not change again.
However, there is consensus in US markets that the Fed will start cutting rates in the second half of 2023. Paul Wong, chief market strategist at Sprott, an asset manager specializing in precious metals, said Gold as a safe-haven asset is attractive because of the risk of recession and financial instability, and at a time when "interest rates could be higher and the dollar is too strong."
He said that the Fed signaled about slowing down the pace of interest rate hikes after seeing lower-than-expected inflation figures. The US consumer price index (CPI) in November was 7.1%, below the 7.3% forecast by economists, pushing gold prices above $1,800 thanks to market expectations that the Fed may apply softer policies to control inflation.
According to Wong, these shifts helped make precious metals the best asset group in November, outperforming equities, the dollar and US bonds.
However, there is also evidence to support the contrary argument that the Fed will continue to be tough in the fight against inflation, which is that the gap between short-term and long-term borrowing costs in the US has reached a wide point. within just over 40 years.
This month, the yield on the 2-year U.S. Treasury note was at 4.2%, while the 10-year Treasury yield was at 3.4%, bringing the gap between the two yields to a close. 0.84 percentage points.
Giovanni Staunovo, an analyst at Swiss bank UBS, said that "it's too early to predict a Fed move" and "it's not yet time to buy gold". But he added: "We believe that in 2023, there will be a period when investors are interested in buying gold, when the market starts to sniff out that the Fed will cut rates."
Debt crisis and persistent inflation
Gold lovers have highlighted concerns that the situation could be worse than the Fed's expectations. Gold has proven its worth in previous economic downturns, delivering returns in five of the seven recessions that have occurred since 1973, including the 2008 global financial crisis and the shock caused by the COVID-19 pandemic, according to the World Gold Council, an industry organization.
Gold lovers believe that the huge debt piles around the world could force central banks to reverse monetary policy sooner than planned.
The world's debt-to-GDP ratio is currently at 247%, much higher than it was before 2007 (less than 200%), according to the International Monetary Fund (IMF). Borrowing to finance COVID-19 operations caused even greater debt during the global financial crisis and beyond.
Most of the debt is in USD. The currency's health inflated the debts of its borrowers, while paying interest was also more expensive because of the high interest rates.
Peter Marrone, President of Yamana Gold, a Canadian gold miner, said that central banks cannot keep interest rates high forever as the debt burden in poorer economies is steadily increasing, this is also what the World Bank (WB) warned this month.
"What happens to all that debt as the dollar appreciates, other currencies depreciate and interest rates go up?" Marrone said. "It simply cannot be maintained forever, and at some point central banks will have to recognize this."
Marrone also warned that there is a high risk of a return to "dramatic inflation" like the 1970s, because price pressures are being driven by systemic problems, such as labor shortages. and a lack of investment that monetary policy cannot address.
In fact, the price of gold actually hit its all-time high in 1980 when it crossed the $800 mark per troy ounce, according to Marrone. Adjusted for today's dollar value, this is close to $2,700 per troy ounce. Therefore, he thinks that the price of gold can still increase.
Robert Crayfourd, manager of CQS Natural Resources Growth & Income fund, said that "there is a possibility that things will fall apart. We believe gold is a relatively cheap hedge asset."
However, despite acknowledging gold's near-term appeal based on expectations the Fed will turn, some fund managers still downplay its long-term appeal.
Gold is currently facing a "generational headwind" due to a younger generation of Western investors not fully understanding it while being more interested in cryptocurrencies, adding that gold does not play a role. in the green transition, according to Nicky Shiels, head of metals strategy at MKS PAMP, a precious metals organization.
Gold also produces no income – while investors, especially large institutions, have more lucrative portfolios than ever before.
"The strength and also the weakness of gold is that it has no yield," Parkinson said. There are many assets, he adds, that still deliver high returns even during recessions.
This argument will be further strengthened if there is a case that inflation is contained without much consequences, and the economic recovery momentum of the US and Europe is solid. Such an environment, according to Mr. Dahdah, "would benefit assets other than gold."
Meanwhile, China's reopening of the economy in the post-COVID-19 period could also hurt the gold market, according to John Reade, chief market strategist at the World Gold Council (WGC). "Inflation could be a drag on gold, as the Fed will tighten policy more quickly. The reason may be due to China reopening."
Should or should not buy gold?
However, gold lovers have another rather solid point. One factor that will help gold shine is record levels of central bank buying. Central banks bought nearly 400 tonnes of gold in the third quarter – the largest amount since 2000, when this data began to be recorded – according to the WGC. The amount of gold that central banks bought in the first nine months of 2022 has surpassed any year since 1967.
Observers suspect that China and Russia are behind these purchases as they want to diversify their holdings after Western allies froze $300 billion of Russia's foreign exchange reserves. This was somewhat confirmed not too long ago when the People's Bank of China (PBoC) reported that its gold holdings increased by 32 tons in November.
In addition, the buying of gold by central banks comes at a time when many individual investors are starting to look to gold.
They started buying bullion and coins on concerns that inflation could last longer than professional fund managers expect, according to WGC data. And perhaps they are even more concerned about geopolitical risks, such as the war in Ukraine and tensions over Taiwan.
"Individual investors in the US seem to believe in the idea that investing in bullion and coins is a safe bet during periods of high inflation and economic contraction," said Alan Goldberg, analyst from BestBrokers, says.
Jewelry purchases have picked up as consumers in China and India returned to their daily lives after the COVID-19 pandemic in the third quarter of this year, while demand for bullion and coins was flat. highest since 2011, up 36% from last year.
In addition, gold could benefit from the crypto crisis, following the collapse of the FTX crypto exchange. "When crypto is in a state of exhaustion, we think gold will emerge as an asset that cannot lose its quality," Louney said.
But central banks and individual investors are not the whole market. The biggest financial investors – institutional investors – are still not convinced by the argument in favor of gold.
Gold exchange-traded funds (ETFs), dominated by institutional investors, have experienced multiple outflows for seven consecutive months. Some fund managers say the woes will only intensify towards the end of the year when portfolios are reassessed and the opportunity cost of holding gold could come into focus.
Gold lovers think that everything will go well when the economic outlook stabilizes. But it's not stable. "Do you think the world in 2023 will be crazier or less crazy than 2022?" said Shaun Usmar, chief executive officer of Triple Flag Precious Metals, which specializes in precious metals.
Source: Vietnam
