Gold prices have entered unprecedented territory, surging to an all-time high above $2,100 per ounce as investors pile into the precious metal amid bets that the Federal Reserve will pivot to cutting interest rates in 2023.
The haven asset rallied over 3% on Monday to hit a record of $2,135 per troy ounce before paring some gains. Gold now trades around $2,066, up 12% in the fourth quarter alone as an array of factors coalesce to light a fire under prices.
From inflation easing to China reopening and increased geopolitical tensions, here’s why gold’s incredible run may have further to go.
Fed Rate Cut Bets Drive Gold’s Relentless Run
Much of gold’s meteoric rise in recent months comes down to interest rate expectations. As investors grow confident that the Fed’s aggressive rate hiking campaign is nearing an end, bets on rate cuts next year are piling up.
This has driven US Treasury yields sharply lower since mid-October. Lower yields burnish the appeal of non-yielding gold. Up nearly 9% this quarter, the precious metal is extending its powerful rally that began back in November 2021.
Ross Norman, CEO of precious metals consultancy Metals Daily, said speculative traders are amplified gold’s rise during a seasonally strong period for prices.
“You have a falling dollar here, a strong seasonal period when bulls can take on the market without compunction, and geopolitical tensions,” he said.
The US dollar index has tumbled over 3% against major currencies since early November to its lowest level in 16 weeks. A weaker dollar makes dollar-priced gold more affordable for overseas buyers.
Fed Chair Jerome Powell added fuel to the fire last week, warning policy is already in “restrictive territory” even as more rate hikes are on the table.
Traders took this as a sign the Fed is nearing “peak hawkishness” and will soon pause its tightening cycle before cutting rates in 2023 as the economy cools. Lower rates reduce the opportunity cost of holding zero-yield gold.
$2,250 Price Targets Emerge as Inflation Eases
While gold has struggled in recent years during periods of rising real interest rates, it appears inflation trends may allow it to overcome this headwind.
Consumer price growth remains well above the Fed’s 2% target but is slowly drifting down from 40-year highs reached earlier in 2022. This “goldilocks” scenario of still-high inflation and peaking rates could supercharge gold returns.
Marcus Garvey, Macquarie’s head of commodities strategy, sees room for another 10% rally from current levels if inflation persists. His $2,250 per ounce price target represents a reasonable upside target should CPI trends cooperate.
“The key to making a more sustainable break higher is likely to include the return of ETF [exchange traded fund] buying, which is still largely absent,” Garvey explained.
Gold-backed ETF holdings sit well below last year’s peaks, suggesting more investment buying could enter to push prices higher as institutional players follow the positive momentum.
Geopolitics, China Reopening Set Stage for $2,500 Price Targets
While Fed policy and inflation dominate gold’s outlook, it’s important not to ignore the impact of geopolitical tensions and China’s reopening.
The Russia-Ukraine war rumbles on, keeping energy and food prices underpinned. Any potential escalation or expansion of the conflict would ramp up safe-haven buying.
Meanwhile China is slowly moving away from draconian zero-COVID policies. This massive source of physical gold demand has been hobbled in 2022. As activity picks back up, imports from the gold-loving nation could increase.
Both factors represent potential catalysts that could shock prices higher just as they did back in mid-2020 when gold briefly traded above $2,075.
Some analysts think if everything aligns perfectly, even bolder predictions like Bank of America’s $3,000 target or Citigroup’s $2,500 call could be reached. This would require not only China reopening and geopolitics turning uglier but also real yields heading sharply lower.
The probability may be low, but with gold already at all-time highs, anything seems possible. With holidays around the corner when jewelry demand sees an uptick, the stars may align for prices to keep dazzling.
Trading Volumes Still Key to Sustaining Record Highs
In the near term, the largest risk to gold’s ascendance is low liquidity with many traders still on vacation. Last week saw the lowest volumes since October 2020, allowing speculative futures flows to whip prices around.
Unless higher trading activity kicks in, gold may struggle to consolidate over $2,100 and hold onto record highs scored this week. But once 2023 gets underway, demand should normalize.
Metals Daily’s Norman thinks gold has run somewhat hot. For a real breakout, broader retail investment demand through gold ETFs will need to pick up pace.
Still, with so many catalysts shifting in bullion’s favor — from Fed policy to inflation trends and rising geopolitical instability — gold has room to glitter even brighter.