Key takeaways
- Gold prices are nearing all-time highs amid economic uncertainty, a weaker dollar and inflation
- Gold mining companies and ETFs are also up so far in 2023
- The precious metal is sensitive to macroeconomic factors, so it could dip in the future – but so far, so good for gold this year
Gold: the oldest valuable commodity in the world, the subject of many songs and a solid investment option during a recession. The price of gold has rallied in recent months, breaking the $2,000 per ounce barrier this week for the first time since 2020.
The ‘safe haven’ commodity’s price is driven by a number of factors which are all working in gold’s favor at the moment. It’s leading some experts to draw the conclusion that we could see gold prices continue to break their own records in 2023 and beyond.
But are these claims overblown, or are we looking at a golden summer for investors? We’ve got the latest on the market and gold’s price predictions.
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What’s new with gold prices?
After hitting a $2,075 high in 2020, gold has underperformed the last couple of years, hitting a low of $1,615 per ounce in September 2022. However, the commodity has rallied to regain huge amounts of its lost value in the last six months.
As of April gold has now broken the $2,000 per ounce price again, with many experts predicting what’s next is an all-time gold price high. The all-time high this decade is currently $2069.40 from 2020, but those investors watching the market closely are calling over $2,100 as a reasonable near-term future price.
What affects the price of gold?
There are a few factors at play that affect gold prices. When there’s an economic downturn, investors’ risk appetite drops and people want a safer option. That in turn drives up the price of gold as more people buy it.
Bond yields have an opposite relationship to gold. If yields start to decline, gold prices typically go up because the returns are better. Likewise if yields start to rise, the price of gold goes down. The two-year U.S. Treasury yield is currently 3.875%, down from its peak of 5.1%, while the ten-year yield briefly dipped below 1.10% down from 1.72% in March.
And finally, the value of the dollar as the world’s reserve currency also comes into play. The bonds market has brought a strong dollar back into line, and gold is worth more in dollars when the currency declines.
Just one of these factors can have an impact on gold prices, but at the moment we’re seeing all three interacting with each other to cause a bull run. If this trinity continues then we could see more and more investors flocking to safety in gold, pushing up prices further.
What about the wider gold market?
Aside from the precious metal itself, companies that trade and sell gold are also enjoying the benefits of a bullish market. With high inflation rates touching every industry, the gold miners have had to pay more for materials and labor. This has eaten into their profits, so an increase in gold prices makes these companies a more attractive investment option.
Barrick Gold Corporation is up over 10% since the start of the year to hit a share price of $19.68, while Newmont has grown 5% in the same timeframe to reach $52.07.
Gold ETFs are also performing well. The VanEck Gold Miners ETF is up 15.78% in 2023 and the SPDR Gold Trust is up 9.8% this year to hit highs of $187.83.
This is a welcome turnaround for gold investors after a lackluster couple of years, and it could have investors flocking as the economic uncertainty continues.
The latest Fed policy
Gold is considered a ‘safe haven’ asset, which means it’s a go-to for investors when a recession could be on the horizon. It’s not a perfect indicator and depends on a lot of different economic factors, so it can be useful to see what the economic data and the Fed are doing to predict if gold might go up or down.
As for recent data, the signs are pointing to the brakes squealing on the economy – and a potential recession as a result. The ADP private payrolls report showed a 145,000 private sector hiring reality versus the 210,000 projected figure.
Unemployment claims are rising and consumer spending is weakening while the core PCE index, the Fed’s preferred measure of inflation, also cooled off to only rise 0.3% in February. This suggests the Fed’s policy of aggressively raising rates to tame inflation is working, though we’ll need to see what other core data sets like CPI reveal to paint a clearer picture.
Could gold prices go even higher?
With all this in mind, could we see gold prices continually breaking records? It’s possible. If inflation is still high and the Fed decides to stop raising interest rates in the near future – which it could do earlier than planned, thanks to the recent international banking turmoil – this is good news for the gold market in 2023.
Gold has appreciated 7% since the start of the year after a measly 1% return in 2022, so when deployed as a hedging strategy against inflation we could see the bull run continue. Some investors are predicting gold to hit an average of $2,075 by 2024, but it all depends on how the macroeconomic factors play out.
The bottom line
While gold prices aren’t a sole indicator of whether a recession is on the way, this latest rally is one to watch amid the economic uncertainty. Should inflation stay high and interest rates are paused, then gold is an option for an investor’s new best friend.
You should always do your own research on whether alternative investments like gold are the right fit for your portfolio, especially as the price of gold is shaped by the world stage. But as it stands, the future of gold is looking bright in 2023.
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