Gold below $1,600 vs. above $2,000: it depends on whether the Fed breaks the economy
(Kitco News) There is a growing fear that the Federal Reserve will break something in the economy by tightening too much. In this scenario, gold could be looking at new record highs this year, according to the LBMA gold price survey.
After kicking the year off with a rally and retracing its steps in February, analysts pointed to three main drivers for gold for the rest of 2023 — the Fed-dollar outlook, inflation and geopolitics.
With 30 analysts participating in this year's annual LBMA price survey, gold's average price was at $1,860 an ounce, and silver at $23.65 an ounce. The range for gold was between $1,594 and $2,025 an ounce, and silver's was between $17.40 and $27 an ounce.
The outlook comes as markets re-price the Fed's rate hike expectations based on the new higher-for-longer interest rates theme. And now gold analysts warn that the U.S. central bank can break something in the economy by hiking too fast.
"Central banks rate hike frenzy is negative for gold. High interest rates increase opportunity cost for holding gold, lowering demand and hence the price," Thorsten Polleit, chief economist at Degussa, said during the LBMA's ‘2023 Precious Metals Forecast Survey: Behind the Analysis.' "Central banks will overdo it — raising interest too much, damaging economic cycle and financial markets to such an extent that their monetary policy tightening will need to end and be reversed later this year."
This is when gold can surge higher, according to Polleit. "I forecast the average gold price of $2k this year with upside potential of up to $2,200 an ounce," he said.
Investors need to remember that monetary policy always acts with a lag, said Nicky Shiels, head of metals strategy at MKS PAMP.
"The hikes we saw last year will come back to the market, and the Fed will ultimately break something before gold can go lower," Shiels said during the webinar.
And investment demand will be the catalyst supporting gold prices. "Massive ETF net outflows contributed to headwinds in gold prices last year. This year, we'll see investment demand re-emerging with the view that the U.S. dollar has peaked," she added.
Shiels is projecting the average price of $1,880 an ounce due to rising stagflation and recession risks, mixed in with higher physical demand.
After ending 2022 flat on the year, analysts still see gold as a good inflation hedge. But the key is understanding how gold price trades in relation to inflation data, noted James Steel, chief precious metals analyst at HSBC.
"Gold tends not to react to the latest inflation data. Instead, it anticipates monetary response to that data. This often explains why gold drops when you get higher inflation print," Steel said during the webinar.
Based on gold's performance in the last two decades, the precious metal increased by 8% per annum, Polleit pointed out. "That has compensated the investors against the inflation rate. In the last two years, gold hasn't shown a close relationship to consumer prices, but this will be temporary," he said.
Also, the fact that the U.S. money supply is contracting for the first time since 1959 is under-appreciated by investors, Polleit added.
"This increases the chance of a recessionary outlook. There is also the possibility inflation will come down much more severely than people expect. We could see 3% CPI later this year," he said.
Other analysts saw inflation as more problematic, ruling out a 3% CPI in 2023.
Also, the de-dollarization theme greatly supports higher gold prices this year. "Central bank gold buying was at record highs in 2022. The de-dollarization theme is playing out this year, especially as de-globalization accelerates," noted Shiels.
Central banks bought 1,136 tonnes of gold last year, and non-Western central banks are expected to remain heavy buyers as they diversify and reduce exposure to the U.S. dollar, said Polleit.
"While I don't believe the greenback will lose its global reserve status overnight, I do anticipate that more private and institutional investors will swamp part of U.S. dollar holdings for other assets, including gold. This should also push the market valuation of gold higher," he said.
The recent devastating earthquakes in Turkey will not likely impact the country's long-term gold ambitions, added Shiels. Last year, Turkey was the biggest official sector gold buyer, purchasing 148 tonnes.
"If the earthquakes have a negative impact on the economy and the lira weakens further, in the medium-to-long term, both physical and central bank demand in Turkey will rebound," Shiels stated.