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Research agency Metals Focus expected that demand for gold will fall by 9% in 2023, as central banks will somewhat reduce their purchases of the precious metal after a record year. As a result, the price will also experience downward pressure in the second half of 2023. New interest rate hikes could also put some pressure on the gold price, provided that it does not cause a recession.
"The expected 9% decline in demand is almost entirely attributable to a decline in net central bank purchases compared to the record year before; Most other market segments will see modest growth," Metals Focus writes in the Gold Focus 2023 report that was recently published. While demand is decreasing, Metals Focus forecasts that the total supply of gold will grow by 2% this year, mainly due to higher gold mine production and increased recycling.
The outlook for the Gold price in the remainder of 2023. While the average price is expected to rise 5% this year to a new all-time high of $1,890 per troy ounce, prices will come under pressure in the second half of this year, the research firm said. "With an expected low of $1,730 per troy ounce for 2023, our forecast suggests a relatively moderate decline of 12% from current levels in late May" said Philip Newman, director at Metals Focus.
Since the beginning of this year, gold prices have risen about 7%, following a strong rally driven by expectations that the Federal Reserve has almost reached the end of a series of interest rate hikes and may even have to raise interest rates. lower at the end of the year. However, the rally in gold came to a halt in early May, as market expectations shifted to the prospect of longer-term higher interest rates. Investor sentiment also revolved due to high expectations of artificial intelligence. As a result, technology stocks rose, at the expense of precious metals. As a result, the S&P 500 index even fell back into a Bull Market rightly. Higher interest rates will have a downward effect on gold prices for the rest of this year. From the report:
"As investors adjust their interest rate expectations, this will create new headwinds for gold prices in the second half of 2023. The likelihood of rate cuts before the end of 2023 will be limited given the continued strength of the US labour market and still high inflation. We still see the U.S. economy heading for a soft landing, giving the Fed room to keep interest rates higher for longer."
According to Gold Focus, the persistently high policy rate by the US central bank is unfavorable for gold, but that does not always have to be the case. It is not only the level of interest rates that is important, but also the underlying inflation. If it is at an even higher level, there will still be negative real interest rates. And that is still the case in the United States and certainly in Europe.
If we analyse the interest rate policy of the US central bank over a period of several decades, we see a striking pattern. When the central bank's policy rate reaches a ceiling, it is always accompanied by a floor in the unemployment rate, followed by rising unemployment. This is followed by a recession and another drastic interest rate cut by the Federal Reserve. We have seen this cycle several times over the past forty years, as the graph below shows.
Interest rate policy versus unemployment in the US
If we project this trend onto the current situation, we can expect the following steps in succession:
If history repeats itself, the gold price could get a new boost at the same time that the turmoil in the financial markets increases again. In the short term, this is difficult to time, but in the long term, the precious metal has proven its worth as a safe haven in times of crisis. As far as gold purchases by central banks are concerned, they will also play an important role this year. From a survey The World Gold Council's report recently revealed that more central banks are planning to expand their stocks. Many countries still have relatively little gold in their reserves and will buy more if the gold price falls.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
