Even though gold is not backing currencies now as it once did, it is still being utilized and sought after by central banks.
2017 2018 2019 2020 Figure 2: Gold Futures - Monthly Chart from QST
and its role as a long-term store of value. It should not be surprising that in a year of increased geopolitical uncertainty, along with rampant inflation, central banks decided to continue adding gold to their reserves and at an accelerated rate. Even though gold is not backing currencies now as it once did, it is still being utilized and sought after by central banks. (Figure 2 above.)
GEOPOLITICAL TENSIONS Up until several years ago, the rise of geopolitical pressures were actually viewed by traders as bearish for the price of gold. The logic behind this was that anything that slows global economic growth would likely limit inflationary pressures, and a weaker inflation outlook could pressure the price of gold. However, that line of thinking has changed as that relationship has reversed. In fact, the relationship between the rise of geopolitical tensions and the price of gold is now positively correlated.
Geopolitical problems are now actually viewed as a reason to move funds into the safe haven of gold. So, what once was a reason to sell gold is now a reason to buy it.
INFLATION Inflation remains a bullish influence even though the International Monetary Fund predicted the global inflation rate peaked in late 2022. However, inflation rates in 2023 are expected to remain higher than usual in many parts of the world. Following the 8.8% global inflation rate in 2022, the IMF forecasts a 6.6% inflation rate for 2023 and a 4.3% inflation rate for 2024 based on its most recent January 2023 update.
15 | ADMISI - The Ghost In The Machine | Q1 Edition 2023
FEDERAL RESERVE MONETARY POLICY The Federal Reserve is likely to continue to hike key interest rates in the first half of this year, which is a bearish influence. The Fed funds rate currently stands at 4.50% - 4.75%, and it is widely anticipated by economists to be increased by 25 basis points at the March 22 FOMC meeting and possibly by another 25 basis points at the May 3 policy meeting. Recent hotter than expected inflation data increased concerns about a more aggressive Federal Reserve. The January consumer price index increased 0.5% when up 0.4% was expected, and the producer price index increased 0.7% over the previous month in January when a gain of 0.4% was anticipated. The January U.S. retail sales report was also considered to be inflationary when it was reported to have increased 3.0% when up 1.7% was predicted.
Meanwhile, the 2 -10 year Treasury yield curve has become even more inverted and is the most inverted in over 40 years. This suggests the Fed may have to be less hawkish in the second half of 2023.
CONCLUSION Gold is likely to be supported by geopolitical concerns, the stubborn inflation situation and the possibility of a less aggressive FOMC later this year.
However, the ongoing central bank buying of gold, which is likely to continue, may be one of the most compelling reasons to expect higher prices.
Alan Bush Senior Financial Economist ADM Investor Services E:
alan.bush@admis.com
2021 2022 2023
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