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Further weakness in the U.S. dollar will drive gold prices higher - VanEck

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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) - Continued weakness in the U.S. dollar should provide further support for gold prices in 2023 as the precious metal starts the year off with a 5% rally, according to two market analysts.

In their 2023 outlook published last week, Joe Foster, portfolio manager and strategist, and Imaru Casanova, deputy portfolio manager at VanEck, said they see several reasons why the greenback has peaked as prices have dropped nearly 10.5% since hitting a 20-year high in September.

The bullish outlook comes as gold prices hold solid gains above $1,900 an ounce, with the U.S. dollar index trading around 102.17 points.

"We expect to see the U.S. dollar weaken further if a recession develops," the strategists said in the report.

The steeped inverted yield curve and the effects of the Federal Reserve's aggressive monetary policy action are two significant reasons why the two analysts expect to see weak economic activity in the new year.

"Just nine months of tightening financial conditions has resulted in the cratering of the housing market, a crash in cryptocurrencies, a derivatives debacle for British pension funds, and the collapse of a major cryptocurrency exchange. What tail risks will the next nine months bring as a slowing economy is likely to be added to the mix?" the analysts said.

VanEck also sees growing geopolitical uncertainty weighing on the U.S. dollar as its role as the world's reserve currency continues to be tarnished.

"There has been a growing reluctance to rely on the U.S. dollar for forex reserves and commerce since Western sanctions have frozen over half of Russia's $500 billion in forex reserves," Foster and Casanova. "Many countries see no guarantees that the U.S. won't use the U.S. dollar to retaliate for some future infraction that is less egregious than bombing a neighbor. As this new world order evolves, there could be less demand for the U.S. treasuries that enable the U.S. to maintain its deficit-fueled lifestyle."

Along with U.S. dollar weakness, VanEck expects the ongoing inflation threat to make gold an attractive hedge to preserve wealth. The analysts said it is unlikely the Federal Reserve has gotten inflation under control. They noted that the government's burgeoning debt, which has reached $31.3 trillion national debt, equal to 124% of GDP, is becoming a significant expense.


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Foster and Casanova added that they expect solid commodity demand, even in the face of a recession, to support rising inflation.

"Energy markets will surely see more volatility, while the rush to green technology will keep upward price pressure on many commodities. Once the Fed stops tightening, we will be watching for the next inflation wave. The Fed might find a second wave more difficult or even impossible to deal with," the analysts said.

While gold has plenty of potential in 2023, VanEck said that the key to higher prices remains in renewed investor demand.

"Global bullion ETFs experienced heavy outflows from April to November. The outflows have now stopped, and while a stronger catalyst is probably needed to prompt inflows, at least the selling pressure has abated," the analysts said. "Perhaps 2023 will bring a renewed focus on the yellow metal."

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