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The Fed's made its move and now it's gold's turn

Kitco News

Welcome to Kitco News' 2023 outlook series. Uncertainty continues to dominate financial markets as central bank monetary policies push the global economy into a recession to cool down inflation. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2023.

(Kitco News) - The gold market appears to be taking the Federal Reserve’s hawkish stance in stride as the precious metal’s price continues to hold on to support around $1,800 an ounce.

This week the Federal Reserve signaled it will continue to raise interest rates in 2023 even if the pace of its rate hikes slows. Last week we warned that an adjustment to the Fed’s interest rate expectations presented a risk to gold. But the meeting has come and gone and gold investors are shrugging off the Fed’s new forecast that their key interest rate will peak above 5% in 2023. Heading into the weekend, February gold futures are down only 0.5% since last Friday.

According to market analysts, there could be a few reasons why gold has remained reasonably resilient following the Federal Reserve’s hawkish stance. One scenario is that investors are now becoming less concerned about inflation and more worried about a recession.

Economic data, from disappointing holiday retail sales to slowing activity in the manufacturing and service sectors, are highlighting a slowing U.S. economy. The concern is that the more hawkish the Fed is, the deeper the impending recession will be.

Many analysts have noted that a recession is a positive environment for gold as investors look for assets, which preserve their wealth. George Milling-Stanley, chief gold strategist at State Street Global Advisors, noted in an interview with Kitco News this week that in the last seven recessions, gold has seen an average return of roughly 20%. The deeper the recession, the better gold does, he said.

The second scenario that could be bolstering gold is that as hawkish as the Fed is, a lot of that is now already priced into the market. Some analysts believe that the U.S. dollar has peaked as the Fed starts to slow the pace of its rate hikes. At the same time, the European Central Bank has just started its hawkish long game, according to ECB President Christine Lagarde.

On Thursday, less than 24 hours after the Fed’s monetary policy announcement, Lagarde came out and said that the ECB will have to raise interest rates by 50 basis points for a prolonged period to bring inflation down. A narrowing of the monetary policy gap between the two major central banks should weigh on the U.S. dollar, which in turn should support gold prices.

Hawkish central banks will test gold bulls' resolve into year-end

There is also a third theory floating around: that the market and investors just don’t believe the Fed. It’s easy to talk tough when the economy and the labor market are still relatively healthy, but what happens when the Fed’s monetary policy action really starts to bite?

Some market analysts have said that if the U.S. enters a deep recession, the Fed will quickly loosen its monetary policies, which will be good for gold.

If you want to find out what’s in store for gold, silver, cryptocurrencies, financial markets and the global economy in 2023, don’t forget to check out Kitco News’ annual outlook coverage. Investors will continue to navigate a world of extreme uncertainty, an ongoing energy crisis, the continuous inflation threat and the potential for a deep recession, and we’ll be looking at how all of these factors impact key markets.

This is also Kitco News’ final newsletter of 2022, so on behalf of the new team, we would like to wish everyone a wonderful holiday season and a prosperous and safe new year.

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.