By Chetan Khanna
Gold is widely known as the ultimate safe-haven investment, particularly during times of crisis. It's a hedge against inflation, a store of value, and a tangible asset that can be used as collateral. Despite some ups and downs, gold is a solid investment that continues to draw the interest of investors. In 2023, gold prices are expected to hit record levels, according to commodity strategists. Turmoil in the global banking sector, central banks nearing the end of their tightening cycles, and recession fears are the main drivers behind this prediction.
Recently, several US regional banks collapsed, culminating in UBS's purchase of the 167-year-old Credit Suisse in a 3 billion Swiss francs ($4.5 billion) takeover. Concerns about contagion risks triggered a sharp increase in the market-implied probability of a US recession, lifting gold prices above the key $US2000 an ounce level and within reach of its record $US2075.47 from the pandemic in 2020.
Figure 1. The surged demand of gold (Goldman Sachs, 2023)
Commodity strategists believe that gold prices will continue to rise in 2023 as the US Federal Reserve reaches the end of its aggressive tightening cycle, triggering a decline in real bond yields and the greenback. Warren Patterson, head of commodities strategy at ING, said: "Fed policy is likely to be key for gold over the medium term. The Fed is likely approaching a peak in the Fed funds rate, and we could see a pivot over the second half of this year. We would expect real yields to follow policy rates lower later in the year, which should prove supportive for gold prices."
Broker Citi is even more bullish, boosting its three-month and six to 12 month price targets to a record $US2100 and $US2300 an ounce respectively. A dovish pivot by the US Federal Reserve at its May policy meeting would add deeper conviction to Citi's outlook. "We are structurally bullish gold into end-2023," says Aakash Doshi, senior commodities strategist at Citi. "It appears the price floor...is now higher and buttressed by an evolving central bank narrative, the compression in real yields at the belly of the US rates curve, and potential US dollar peak."
CMC Markets agrees that an earlier Fed rate pivot would trigger another surge in gold prices, and predicts they could rocket as high as $US2600 an ounce due to a decline in the US dollar and bond yields. Goldman Sachs believes the sharp spike in gold prices during March can be almost entirely explained by an increase in fear-related demand amid the US banking crisis and increasing recession risks.
While gold has struggled over the past year in a macro environment lacking fear and wealth, Sabine Schels, senior commodities strategist at Goldman Sachs, said: "While gold has struggled over the past year in a macro environment lacking fear and wealth, we believe both factors are stacked this year." Goldman upgraded its 12-month price target to $US2050 an ounce, but says it will be challenging for prices to move sustainably above $US2100 without the Fed cutting rates amid a US recession. Goldman expects the heightened risk of a hard landing to cause investors to start buying gold exchange-traded funds (ETFs) again after significant outflows in 2022.
Weak demand from ETFs in 2022 was offset by strong buying from central banks which purchased almost 1136 tonnes of the commodity last year. Turkey and China were the largest known buyers, adding 148 tonnes and 62 tonnes respectively. This has continued in 2023, with Turkey and China adding another 23 tonnes and 15 tonnes respectively in January 2023. ‘‘We expect central banks to remain buyers, not only due to geopolitical uncertainties but also due to the economic climate,’’ Patterson says. Emerging market central banks continue to boost demand for the precious metal following a record buying spree of 1135 tonnes last year. Goldman Sachs expects that figure to increase to 1300 tonnes in 2023, fuelled by heightened geopolitical tensions. Despite the continuous inventions of new technologies and methods of storing value such as cryptocurrencies, it is clear in times of panic, we all resort to gold.
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