March 7

Gold’s Price Floor 2023: Has it Already Arrived?

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Gold had a strong rally in early 2023, reaching a 9-month high of $1959 in February before declining to $1808 by the end of the month (-7.71%). However, industry experts believe that gold's outlook has improved since then. 

With recession warnings, signs of prolonged inflation, and geopolitical tensions, many experts think gold has found support and a price floor at $1800. For example, Nicky Shiels, head of metals strategy at MKS Pamp, called $1800 a "physical floor" due to underpriced geopolitical and ‘hard landing’ risks. Similarly, Michele Schneider, director of trading education and research at MarketGauge, sees $1800 as a floor for gold prices due to those same catalysts. 

A closer analysis significantly supports their claims.

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Recession Warnings

Morgan Stanley's warning that the 2023 stock rally might be a 'Bull Trap' has sparked investor caution, despite current stability in consumer spending and employment metrics. 

Moreover, recession indicators linking bond yields to the economic outlook from the Cleveland Fed and the New York Fed suggest an increased likelihood of an economic downturn by February 2024. The Cleveland Fed predicts a 62.7% chance of a recession by February 2024, while the New York Fed sees a 57.1% chance, a 10-point increase from its last reading.

Worse, The Conference Board's consumer confidence index fell sharply in February for the third straight month. Economists at Wells Fargo cautioned that this consumer confidence data "pours some cold water” on some reasonably solid economic data.

In the same week as the release of all this sobering data, somehow, under the radar, CBO Director Phillip Swagel described the U.S. debt situation as “dire” to the House of Representatives. 

These economic concerns paint a troubling picture, amplifying uncertainty and strengthening the potential upside of gold. In such circumstances, investors may seek gold as a safe-haven asset to shield their wealth from economic uncertainties. Especially, if gold indeed reached its price floor already.

Related: How to Diversify Your 401(k) or IRA with Physical Precious Metals

Recession definition

Prolonged Inflation

By now, you’ve felt the crushing blow of inflation. Price hikes can eat away at your purchasing power and affect everything in your daily life, from a trip to the grocery store to your electric bill. During periods of high inflation, alternative stores of value like gold become increasingly appealing, and prices tend to increase. 

Recent signals suggest that inflation is likely to persist. The Federal Reserve struggles to bring inflation back down to its target of 2% despite raising its target interest rate in eight straight meetings. Worse, inflation may actually be heating up again.

The Consumer Price Index (CPI) rose 6.4% year-over-year in January, exceeding market projections of 6.2%. It also increased by 0.5% month-over-month. Worse, the core CPI, the Fed’s preferred gauge, which excludes food and energy prices, rose for the 32nd consecutive month and came in higher than expected. 

However, according to Michele Schneider, one overlooked indicator shows that inflation and gold’s upside are nowhere near peaking: the price of sugar. Schneider says that because of sugar’s widespread usage in food products, persistently elevated sugar prices suggest that inflation should persist. She also implies that supply constraints in industrial metals such as copper, aluminum, and tin should continue, thus driving up prices and keeping inflation elevated.

CEO David Solomon further expressed concerns about inflation at Goldman Sachs's second-ever investor day. He noted that many CEOs he speaks with expect inflation to be stickier and more challenging to moderate than current market predictions suggest. While some predict a "soft landing," inflation concerns hamper confidence.

Related: American Hartford Gold Review - Reputable Gold Dealer for 2023?

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Investors tend to flock to gold during wars and geopolitical uncertainty due to its properties as a tangible safe-haven asset. However, even the sheer thought of war can cause gold prices to surge, as happened over two months before Russia invaded Ukraine over a year ago. Following the invasion, demand for gold in Russia reportedly increased fivefold

While tensions with Russia persist and show concerning signs of worsening, China is the most significant geopolitical catalyst for a potential gold rally. Of course, China and the United States' simmering tensions have been brewing for years. Still, recent developments suggest an escalation to boiling point. On March 7, 2023, Chin announced that its relationship with the U.S. had veered off a 'rational path,' with imminent conflict on the horizon unless someone ‘hits a brake.’ 

The situation is complex and extends beyond a single event, such as the Chinese spy balloon breaching U.S. airspace. The CIA believes China will inevitably invade Taiwan by 2027. However, it could also come sooner. While the U.S. expands its troop presence in Taiwan, China plans to increase defense spending by 7.2%, or $230 billion, in 2023.  

Reuters reports that these catalysts have caused gold demand in China to surge and potentially remain strong in the coming weeks. However, this trend has been around for a while. Since 2022, gold prices on the Shanghai Gold Exchange have traded at a historic premium compared to the London Metal Exchange. Premiums more than doubled between 2021 and 2022. Additionally, as of early March 2023, Shanghai offered roughly $35 per ounce to new imports, over four times the typical premium.

Related: A Year After Russia-Ukraine - Looming War with China?

The Key Takeaway

Gold has been a reliable asset for investors seeking to hedge against instability and uncertainty for millennia. Despite a recent downturn in February 2023, mounting catalysts and analyst forecasts suggest that gold has hit its price floor for the year. Moreover, recession concerns, prolonged inflation, and geopolitical tensions look like they will persist and worsen, indicating a potential gold bull market.

In a scenario where economic and geopolitical conditions continue to deteriorate simultaneously, it could lead to investors fleeing from riskier assets and seeking the relative safety of gold, driving up demand and prices. We are genuinely at a point where gold's $1800 support level and price floor look plausible. Day by day, Swiss Asia Capital's $4,000 price target no longer looks overly bullish.  

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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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