Make Kitco Your Homepage

Gold price is not done falling, but 2023 outlook promises returns as Fed starts to ease - ING

Kitco News

(Kitco News) Gold is still in danger of falling lower and giving up its recent gains, but the longer-term outlook is more constructive as the Federal Reserve shifts from tightening to easing next year, according to ING.

Gold has been seeing head-turning gains in November and the beginning of December, but the rally has a high chance of fizzling out as the U.S. central bank is still raising rates, said ING's commodities strategist Ewa Manthey.

"We expect gold to remain on a downward trend during the Fed's ongoing tightening cycle," Manthey said in the Dutch bank's outlook for 2023.

But looking into next year, things begin to shift for the precious metal, which has been battered down by this year's strong U.S. dollar and higher yields.

"While in the short term we see more downside for gold prices amid monetary tightening, any hints from the Fed of an easing in its aggressive hiking cycle should start to provide support to prices. For this to happen, we would likely need to see signs of a significant decline in inflation," Manthey described.

The Fed will be ready to switch tactics only when inflation starts to noticeably cool, which will likely happen next year. "We should see inflation coming off quite drastically over 2023, and this will then open the door for the Fed to start cutting rates over 2H23, according to our U.S. economist," Manthey said.

As the Fed begins to ease its policy in the second half of 2023, the gold price will rise and maintain its solid gains. ING sees gold advancing to $1,850 an ounce in the fourth quarter of next year. At the time of writing, February Comex gold futures were trading at $1,781.60, up 0.02% on the day.

"Under the assumption that we see easing over 2H23, we expect gold prices to move higher over the course of 2023 with prices reaching $1,850/oz in 4Q23," Manthey pointed out.

Record gold buying from central banks, one of the few drivers helping gold out this year, will continue to support prices in 2023.

"During times of economic and geopolitical uncertainty and high inflation, banks appear to be turning to gold as a store of value. The latest data from the World Gold Council (WGC) shows … central banks bought 399 tonnes in 3Q22, which is up 341% year-on-year and also a record quarterly amount … The pace at which central banks have accumulated gold reserves this year has not been seen since 1967," the strategist said. "Given the current environment is likely to persist, central banks are likely to continue to add to their gold holdings in the months ahead."

Physical demand from China is expected to pick up, but gold's price direction will depend more on investment flows, and things are not looking promising on that front yet.

"In the third quarter, investment demand was down 47% year-on-year, as ETF investors responded to a challenging combination of markedly higher interest rates and a strong U.S. dollar," Manthey noted. "Speculative positioning in COMEX gold further highlights the lack of investor interest – the latest COMEX exchange numbers showed that speculators in U.S. gold futures were betting on lower prices, however, the number of the bets had declined."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.