May 12

Gold in 2023: The Beacon Amidst Economic Uncertainty

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Days before we got word of April's inflation figures, CNBC spotlighted the unwavering investment demand for gold as a reliable safe haven in uncertain economic times. 

Now that April's inflation figures have arrived, speculation is rife about the Fed's possible response and how these numbers could further propel gold prices, particularly if the inflation remains stubbornly high.

But remember, the story runs much deeper than inflation and the Fed alone. Worrisome factors like the ongoing banking crisis, a potentially explosive debt ceiling standoff, and worsening geopolitical tensions are also at play. 

As we approach the midway point of 2023, the gold market thrives amidst this array of influences. The question, though, is, should these catalysts persist, how high can the price of gold go by the end of the year and beyond? So let’s first do a little bit of a deeper dive into what's influencing the price of gold.

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The State of the Economy 

As economic uncertainty looms, confidence in key figures plummets—a recent Gallup poll revealed a meager 35% of Americans trust President Biden's economic leadership. Fed Chair Jerome Powell's approval rating hit a record-low 36%. Public faith in Treasury Secretary Janet Yellen has also dipped to 37%. 

It's understandable why. Banks are failing; inflation's still high, the Fed's giving us mixed messaging, and the recession risks are mounting. As if we didn't have enough economic headwinds to worry about, now we have an impending debt ceiling standoff too. Yet, in these turbulent times, gold emerges as a beacon of stability and an attractive hedge against increasing uncertainty. 

The Banking Crisis

The U.S. banking sector's upheaval, which began with the failures of Silicon Valley Bank and Signature Bank, warrants close attention from gold investors. With First Republic's situation going from bad to worse and PacWest potentially the next domino to fall, gold's appeal strengthens as a safe haven with no counterparty risk and a portfolio diversifier.

Rooted in the Fed's long-term interest rate policy mismanagement and exacerbated by government regulators' encouragement of risky securities, the crisis challenges over 2,315 U.S. banks deemed insolvent on a mark-to-market basis, according to a Stanford paper.  

Related: How to Add Physical Gold & Silver to Your 401(k) - Tax and Penalty Free

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April Inflation and the Fed’s Response

The April inflation report reveals valuable insights that could influence gold prices. Despite the month-over-month Consumer Price Index (CPI) indicating a potential slowdown with a 0.4% increase in April, and the year-over-year inflation figure at 4.9%, this situation favors gold for two reasons.

Firstly, although inflation seems to be decelerating, it remains stubbornly high. New York Fed President John Williams confirmed this himself. Furthermore, in a broader context, prices have risen 13.6% compared to two years ago. Since investors often turn to gold as a reliable store of value during inflation, this enduring high inflation could propel demand.

Secondly, despite the high inflation, recent signals from the Federal Reserve suggest a possible pause in rate hikes, which could significantly impact gold prices. As gold thrives in low-interest-rate environments, this pause may further boost prices. Analysts predict an 82% chance of the Fed maintaining rates in June and a 33% chance of a rate cut in July. 

Gold prices recently climbed to $2,055 per ounce on Comex (May 11, 2023), marking the second-highest level on record. This increase aligns with Reuters' observation of a rising trend in gold prices and Kitco’s report connecting gold’s rally to policy hints from the Fed.

The Debt Ceiling

The recent surge in gold prices to its second-highest level on record is partly due to the debt ceiling crisis. The U.S. is at risk of a national debt default as President Biden and Speaker Kevin McCarthy struggle to agree on raising the debt ceiling. Biden highlighted the severe consequences of a default, including a major recession, job losses, and rising borrowing costs, adding to existing economic challenges.

As the critical meeting between both parties approaches, the nation awaits the outcome and its effect on the economy and the potential impact on gold prices.

Related: How to Diversify Your Savings with Physical Gold and Silver (Free Guide)

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The Other Catalyst: Geopolitics

Outside of a questionable economic environment, simmering geopolitics could continue to affect the price of gold, particularly with Russia-Ukraine tensions persisting, China’s gold buying spree, and the de-dollarization trend.

Russia's Gold Market and the Ukraine Conflict

Gold prices remain vulnerable to the ongoing geopolitical turmoil between Russia and Ukraine. Leaked Pentagon documents expressing doubts about Ukraine's spring offensive and the presence of European special forces in the region contribute to global unease.

The UK's recent decision to supply Ukraine with Storm Shadow long-range cruise missiles further complicates the situation, prompting the Kremlin to threaten an "adequate military response."  

The escalating conflict has affected Russia's gold market, with major banks such as JPMorgan and HSBC withdrawing from it. In addition, economic sanctions have forced Russia to sell its gold reserves through less transparent buyers, as reported by Business Insider. This development could lead to further gold price movements.  

De-Dollarization and China's Gold Splurge  

Bloomberg reports that China's gold reserves have risen for the sixth month in a row, with data from the State Administration of Foreign Exchange revealing an increase of 8.09 tons in April alone. This latest shopping spree brings the nation's total stockpile to approximately 2,076 tons. 

Most importantly, the continuous growth in China's gold reserves signals a strategic diversification away from U.S. dollar-denominated assets. This move could support gold prices by offsetting potential demand reductions elsewhere and further bolster the de-dollarization trend. 

Related: Gold Rush 2023 - Central Banks Lead Historic Buying Spree

U.S. dollar burning

De-dollarization?

De-dollarization, a process where emerging economies shift from relying on the U.S. dollar to backing their currencies with gold, is gaining momentum. Countries such as Russia, India, and China actively seek to reduce dependence on the U.S. dollar as the global reserve currency. China's assertive approach is particularly notable. As the world's second-largest economy, China's actions inevitably create ripple effects in the global economy, impacting gold prices.

Moreover, MarketWatch reports that central banks and governments now hold roughly 20% of all gold ever mined, emphasizing the precious metal's importance in global finance. This development, combined with China's rising gold reserves and the ongoing de-dollarization process, highlights the increasing significance of gold as a strategic asset for China and other central banks worldwide.  

Related: Diversify Your Savings with Physical Gold and Silver

Gold in 2023: How High Could Gold Go?

As 2023 progresses, gold's performance and outlook hinge on various factors, including inflation, Federal Reserve policy, geopolitical tensions, and shifts in the global economy. Numerous precious metals analysts and experts have recently offered their gold price predictions.

Don Durrett, a renowned precious metals expert, envisions gold soaring to new heights in 2023, potentially exceeding the $2,500 mark, driven by the catalysts mentioned above and a weakening U.S. dollar. 

In the same vein, a recent Kitco column anticipates gold's value will climb throughout the year as the Federal Reserve pauses its tightening cycle, fostering a favorable environment for the precious metal. Columnist Jordan Roy-Byrne highlights that some analysts foresee gold reaching $4,000 by 2025. 

Given these expert forecasts, it’s worth keeping a close eye on how the rest of the year shakes out. While nobody has a crystal ball in the investment world, the facts and figures don’t lie, and the environment we’re currently living through is tailor-made for a potential gold rush. 

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About the author 

Robert Samuels

Robert Samuels is a financial copywriter and business advisor. After teaching himself stock market basics and financial fundamentals, he leveraged this newfound passion into a Master’s Degree from Harvard University’s ALM Finance extension program, where he received a 3.87 GPA and Dean’s List distinction.

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