(Kitco News) After a historic tightening cycle by the Federal Reserve, a recession or a significant economic slowdown is looking very likely. But will that be good for gold?
For most of 2022, an aggressive Fed coupled with a strong U.S. dollar had weighed on gold, putting a price cap on any potential rally.
"The stronger USD also weighed on the precious metal sector. Gold fell amid the decline in investor demand," Australia and New Zealand Banking Group's (ANZ) senior commodity strategist Daniel Hynes. "Synchronised rate hikes have weighed on gold in 2022."
Year-to-date, spot gold is nearly flat, down 0.3%. This is after a December rally that took prices from a low of $1,750 an ounce at the beginning of the month to Tuesday's high of $1,830 an ounce.
The year-end gold price rally is coming when the global economy is at an inflection point.
"Tighter monetary policies amid high inflation are likely to slow economic growth in 2023," said Hynes. "This backdrop is typically positive for gold."
During the December meeting, the Fed raised rates by 50 basis points, which brought the total increases for the year to 425 basis points.
The updated median forecast for next year shows that rates could go up to 5.1%, with Powell stating that rates will stay elevated "for some time."
ANZ expects the U.S. fed funds rate to peak at 5%, followed by a pause in rate hiking. Hynes added that this should turn market sentiment in favor of gold. And the U.S. dollar will play a big role in helping gold move higher.
"This comes as we approach the end of U.S. dollar dominance, and a depreciation in the currency would add further support to investor demand," he explained. "With the Fed suggesting rates will remain high through 2023, the risk of weak economic growth next year. Gold prices tend to come under pressure ahead of recessions but then outperform other markets (such as equities) during them."
