(Kitco News) With markets in the third week of 2023, gold is already up 4.5% and trading above the critical $1,900 an ounce level. But for the rally to continue, the precious metal needs to keep settling above this psychologically-important level, warned Australia and New Zealand Banking Group (ANZ).
After lagging last year, gold has finally made its move, with many analysts even looking for new record highs this year on the expectations of cooling inflation and a Federal Reserve pivot.
Gold is a hedge against a 2023 slowdown, wrote ANZ in its report released Monday. "We expect gold to remain in favour as inflation retreats and interest rates near their peak. Prices have rebounded strongly after the past year's correction, amidst the Federal Reserve's most aggressive monetary tightening since 1980," said ANZ.
Drivers supporting gold as an asset in 2023 include a pause in the Fed's interest rate cycle, recession risks, a weaker U.S. dollar, high geopolitical risks, and strong physical demand, the bank said.
However, in the short-term, gold looks at risk of a correction due to the technical set-up, noted the bank's strategists Daniel Hynes and Soni Kumari.
"The recent rally looks vulnerable to a price correction as it was largely driven by expectations that the Fed will turn dovish. Any disappointment on the monetary policy front could see prices correcting in the short term. We keep our 12-month price target unchanged at USD1,900/oz," they wrote.
With gold surging to $1,918 an ounce after breaking above $1,900, the yellow metal is trading well above its 200-day moving average.
"Prices need to continue settling above USD1,900/oz to maintain this momentum. We believe the macro environment is not supportive enough to sustain the current price level. We notice that there is a rising wedge formation in the daily technical chart," the strategists warned. "Should prices fall from current levels to the USD1,870–1,900/oz range, we expect the trend to reverse. Below USD1800/oz gives a confirmation of price falling fall back to USD1,730."
All eyes will be on the conclusion of the Federal Reserve monetary policy meeting on February 1. Markets are currently looking for a 93.2% chance of a 25-basis-point hike, according to the CME FedWatch Tool.
"At its December meeting, the central bank increased the target policy range by 50bp, taking the top end to 4.5%. This was a modest rise following four successive 75bp hikes," the bank said. "The Fed is likely to struggle to get inflation back to its target range of 2% ... It should be holding its interest rate steady at 5% into 2024. This is against market expectations of rate cuts in late 2023 and leaves room for a price correction. We believe a synchronised easing cycle will begin from 2024."
Longer-term, ANZ is constructive on gold. "Investment and physical demand are supportive for 2023. China's reopening sets the stage for resilience in the buying of physical gold," the report noted. "There is a consensus view that a recession is coming, with global economic growth falling to 2.4% in 2023. This would be the lowest level of the last four decades, excluding the GFC and the first year of COVID-19."
There is also a risk of stagflation, and in this scenario, there will be more strategic positioning building in gold. "Gold normally outperforms equities before and during a crisis, delivering nearly 16% average return.," the report said.
A weaker U.S. dollar is something to keep a close eye on in 2023. "After rising 29% since its low in mid-2021, we believe the USD peaked near 114 in Q4 2022 and recently fell below the 200-day moving average. Gold has tended to deliver an average 12-month return of 18% after USD peaks," Hynes and Kumari said.
On the geopolitical front, gold will remain in demand because of the ongoing war in Ukraine, growing tension between the U.S. and China over Taiwan, Iran's nuclear program, and North Korea's unprecedented level of missile testing in 2022.
"These looming geopolitical disturbances are potentially major sources of economic and financial risks. Such a backdrop lends support to haven asset investment. Even central banks continue to build their gold reserves to diversify their foreign reserves. A higher geopolitical risk premium has kept gold prices steady," ANZ said.
Physical demand will also offset soft institutional demand in 2023, according to the ANZ's outlook.
"Retail investments (bar and coins) are strong, as stagflation and geopolitical risks encouraged retail investors to buy. We estimate this will reach a multiyear high of more than 1,200t in 2022. Exceptional buying by the central banks of some emerging market economies supported the offtake of physical gold. They took up 399t in Q3 2022, which was a record quarterly purchase," the report said. "China's jewellery demand will be a main source of incremental growth this year."
