Disappointing many investors, gold followed a boom-bust pattern last year. It moved to a high of just over $2,050/oz in March, then dropped to a low of $1,617/oz in early November, only to rebound into the $1,820s at the end of the year. The global inflation spike and the sharply higher real interest rates along the Treasury curve, driven by the Fed’s aggressive tilt to a restrictive monetary policy stance, are largely responsible for the downside moves experienced last year. The sky-high US dollar, as the Fed became the most hawkish central bank, along with CTA trend following funds and spec selling, also played a very big role in knocking gold from its highs in 2022.
In early 2023, the yellow metal jumped above $1,900/oz amid growing expectations that waning inflation, a weakening economy and post-COVID supply chain normalisation will prompt the US central bank to pivot toward a more dovish policy. Strong private physical demand, very aggressive central bank and official sector buying, which likely totalled as much as 1,000 tonnes over the previous 12 months, also played a big role in providing fuel for the gold market recently. To the extent that official sector buying and strong physical product demand has propelled gold over and above what is dictated by the foreign exchange, interest rate and macroeconomic environment, we believe that gold is at risk of trending lower in early 2023, as it is too soon to say that the FOMC will deliver an early monetary easing. The likely normalisation of feverish official sector buying may also serve as a catalyst for a limited downside in the short term, which may see the yellow metal gravitate down towards $1,825/oz over the first three months of the year. However, once rate cuts become more certain, we expect the combination of lower real rates along the short end of the curve and a weaker US dollar to push gold toward the highs seen last year. Speculative investor long participation, improved ETF sales, weaker US dollar and more favourable carry will likely be the most important upside drivers.