Looking back at 2023, the world has entered a period of turbulence not seen in decades, and investors have also witnessed one history after another. Under the shadow of geopolitical uncertainty, the light of safe haven asset gold shines even more brightly.
Throughout the year, as inflation remains high, the main central bank's tightening policies will continue in 2023. In addition, with the prolonged conflict between Russia and Ukraine and the outbreak of new conflicts in the Middle East, market participants have faced significant uncertainty over the past year. The gold market strongly feels this turbulence, although the overall trend is somewhat bumpy, gold prices still reach a historic high.
As of publication, the international gold price has risen by 12.7% so far this year, and is expected to achieve its best annual performance since 2020, while the spot silver price has only risen by less than 1%.
Trend Review
At the beginning of this year, driven by the weakness of the US dollar and the decline in 10-year US Treasury yields, gold prices quickly rose, leading to a unilateral upward trend. However, with the Federal Reserve announcing a 25 basis point interest rate hike in early February, gold prices immediately plummeted. In March, the banking crisis hit the United States and had an impact on the global financial system, with safe haven sentiment once again driving up gold prices.
In the second quarter, investors continued to lack confidence in the global banking system, prompting gold prices to break through the $2000/ounce mark in early April. As the Federal Reserve continued to raise interest rates and confidence in the banking industry recovered, gold continued to decline in late May and June.
The third quarter was the calmest quarter for the gold market this year, showing a narrow range of fluctuations, but the largest decline occurred in the last few days of the quarter.
A new round of conflict broke out between Palestine and Israel in the fourth quarter, and as the war continued, gold continued to rise throughout October. Supported by geopolitical crises and other factors, gold prices soared to a record high of $2152.30 in early December.
The end of the Federal Reserve's interest rate hike cycle
The Federal Reserve raised interest rates four times in 2023 and has been standing still since July. After this month's policy meeting, Federal Reserve officials released forecasts for at least three possible interest rate cuts next year.
In addition to the Federal Reserve, the European Central Bank and the Bank of England have also begun adjusting their strategies to prepare for a world where inflation is tamed. This shift marks a turning point in the global economy and brings new trading logic to gold.
When the inflation adjusted yield (i.e. actual yield) decreases, investors often turn to gold instead of bonds. Compared to non interest bearing gold, a decrease in yield will weaken the attractiveness of bonds with regular interest payments. The decline in US bond yields has also dragged down the US dollar exchange rate, making gold cheaper for investors outside the US.
"Gold has become a barometer reflecting the Federal Reserve's expectations of interest rate cuts and widespread low sentiment," said Nicky Shiels, metals strategist at MKS PAMP
John Reade, Chief Market Strategist at the World Gold Council, said that interest rate cuts are often seen as good news for gold, as cash asset returns decline and depositors turn to other high-yield investments. However, two factors may indicate that the expected relaxation of policy interest rates may not be as optimistic for gold. Firstly, if the cooling rate of inflation is faster than the cooling rate of interest rates, then real interest rates will still remain high. Secondly, lower than expected economic growth may hit demand for gold consumption.
Geopolitical risks
2023 is a turbulent year. Trade frictions and geopolitical contradictions between countries are deepening. In addition to the Russia-Ukraine conflict, the Middle East, the Asia Pacific and other regions are also in turmoil. Investors describe this situation as a "chaotic era" (that is, the world tends to war and chaos for a period of time). They often buy gold when they feel uneasy about the situation.
First of all, the conflict between Russia-Ukraine conflict has shown a long-term trend in the confrontation. The Ukrainian army launched a major counter offensive in the middle of the year, but little progress has been made. Since late October, it has been forced to shift from active attack to defense. Russia has regained its initiative and is accumulating resources for a new phase of winter warfare, which may include attempting to expand its gains in the east and carrying out significant strikes on Ukraine's critical infrastructure.
In addition, the conflict between Palestine and Israel has intensified again after many years. The latest data shows that this round of conflict has resulted in at least 20000 deaths in the Gaza Strip. At the same time, the Yemeni Housai armed forces have repeatedly claimed to launch attacks on "ships related to Israel," which has made the situation in this geopolitical stronghold of the Red Sea suddenly tense.
The International Monetary Fund (IMF) stated last week that many central banks and governments around the world continue to move towards de dollarization, with the US dollar's share of global central bank foreign exchange reserves decreasing in the third quarter. Specific data shows that in the third quarter of this year, the proportion of US dollars in global official foreign exchange reserves was 59.2%, and in 2001, the proportion of US dollars was once as high as 72.7%.
In the long run, the weaponization of the US monetary system may lead to more countries moving towards de dollarization, especially if tensions between the US and major powers further intensify, which will further boost demand for gold in various countries.
Global central bank gold buying frenzy
A report from the World Gold Council shows that with market turbulence and geopolitical uncertainty driving demand for gold, current global central bank gold purchases have reached record levels.
Driven by the central banks of China, Poland, and Singapore, the net gold purchases of each central bank reached a record high of 800 tons in the first three quarters of 2023. This year's net purchases are expected to break the historical high of 1136 tons last year.
In the third quarter of this year alone, central banks purchased a total of 337.1 tons of gold, which is the third highest quarterly purchase volume in the World Gold Council data series since 2000.
"The strong demand from central banks confirms our view that last year's growth was not a one-time event," said Read from the World Gold Council. He predicts that this year's gold demand will reach or exceed last year's levels.
The People's Bank of China is the main force in gold purchasing, purchasing 78 tons of gold in the third quarter and 181 tons of gold since January. However, the smaller central bank also bought a large amount of gold, with Poland buying 57 tons and Türkiye buying 39 tons.
Akash Doshi, head of commodity research for the Americas at Citigroup, said that despite the rapid rise in interest rates, purchases by central banks were a key reason for the strong value of gold last year. "The lower limit of gold's structural price has been raised, and the central bank is an important factor."
Outlook
The World Gold Council stated in its 2024 Gold Outlook report this month that after experiencing a surge in 2023, the combination of geopolitical tensions and continued central bank buying should continue to boost gold prices next year.
The report also mentioned that many economists currently expect the US economy to achieve a soft landing, and based on past data, a soft landing has not boosted gold prices overall, with gold prices either remaining stable or falling.
However, many major economies, such as the United States, the European Union, and India, will enter an election year next year, which should encourage investors to hold effective hedging tools in their investment portfolios - gold.
Of course, there are also some unfavorable factors for gold. James Steel, Chief Precious Metals Analyst at HSBC, pointed out that such high prices may also slow down the pace of physical gold purchases, not only by central banks, but also by China and India, the two largest buyers of gold bars, coins, and jewelry.
Steel added that by the time gold prices reached $1900 per ounce, recovery rates in countries such as India had already jumped, and more consumers hoped to take advantage of the high gold prices to cash out. He said, "If you don't actually have the support of retail consumers, then you really only have investors to continue supporting the market."
Nevertheless, Wall Street analysts are generally optimistic about the medium-term prospects of gold. JPMorgan Chase predicts that a series of interest rate cuts by the Federal Reserve from the second half of 2024 to the first half of 2025 will raise gold prices to $2300.
GraniteShares fund manager Jeff Klearman said that the significant weakening of the US dollar and the sharp decline in US Treasury yields from recent highs of 5% have all contributed to the rise in gold prices. In addition, the expectation of the Federal Reserve cutting interest rates in the first half of next year, geopolitical uncertainty surrounding Ukraine and the Middle East, and "increasing awareness of the potential impact of the massive and growing US government debt" have also benefited gold and may continue to support its price trend in the future.