World Bank sees gold prices falling another 4% in 2023
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(Kitco News) - The price environment for gold will be challenging next year as the Federal Reserve is expected to continue to raise interest rates well into 2023, the World Bank said in its latest commodity price forecast.
The international financial institution said in its updated forecasts, published Thursday, that it looks for gold prices to fall another 4% next year. This comes after noting that gold prices fell 8% in the third quarter.
"The increase in interest rates and appreciation of the U.S. dollar outweighed concerns about rising inflation and geopolitical risks," the analysts said in the report. "The U.S. Federal Reserve has raised policy rates five times this year by a combined 3 percentage points, which has led to the U.S. dollar index increasing 16 percent to a 20-year high. Meanwhile, the yield on 10-year Treasury Inflation-Protected Securities (TIPS) reached its highest level since February 2011, raising the opportunity cost of investing in zero-yield assets."
The latest price projection is a mixed bag compared to the World Bank's forecasts in April. The bank was looking for gold prices to rise modestly in 2022 and then drop 10% next year.
The updated outlook comes as gold prices continue to hold long-term support at around $1,650 an ounce. Another 4% drop in the price would push gold prices to $1,600 an ounce.
The report noted that investment demand in gold continues to have the biggest impact on market prices. For five consecutive months, investors have liquidated their positions in global gold-backed exchange-traded funds.
At the same time, the report noted that lower gold prices have helped support physical demand; however, this will not have much impact on prices.
"Physical purchases are unlikely to be sufficient to offset the monetary headwinds facing investment demand. As interest rate hikes are likely to continue well into next year, gold prices are projected to fall by 4 percent in 2023," the report said.
Looking at silver, the report said that prices plunged 15% in the third quarter, underperforming gold as recession fears weigh on the metal's industrial demand expectations.
"Although photovoltaic demand continues to grow, consumer electronics demand has weakened considerably, with global electronics production falling for the fifth consecutive month in September," the report said. "Lackluster physical and investment demand are expected to keep silver prices under downward pressure. Silver prices are expected to be lower by 16 percent in 2022 and remain soft in 2023."
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However, over the long term, the bank remains optimistic that silver prices will recover.
"Silver stands to benefit from the energy transition, particularly for its use in solar photovoltaic cells," the analysts said.
Looking at the broader commodity index, the analysts warn of continued volatility as focus in the marketplace shifts between an impending global recession and an imbalance in supply/demand fundamentals.
"As the global growth slowdown intensifies, commodity prices are expected to ease in the next two years, but they will remain considerably above their average over the past five years," the report said. "Prices will likely remain volatile as the energy transition unfolds and demand moves from fossil fuels to renewables, which will benefit some metal producers."
Looking at energy prices, the World Bank expects to see an 11% decline in 2023 after prices surged 60% in 2022.