Gold Bulls! Any Champagne Left From New Year’s?

Gold entered 2023 touching $1,850. It bodes well for the new year.

Gold entered the new year with a bang! As the chart below shows, the London P.M. Fix jumped about 1.6% from $1,814 at the end of 2022 to $1,843 on January 3, 2023. I hoped that the gold bulls have some champagne left over from New Year’s Eve!

During intraday trading, gold performed even better, as it touched $1,850 for a while, a level not seen since June 2022. Now, the question is whether it was just a one-off or the beginning of a rally in the gold market? Well, it’s hard to tell at this point, as the very beginning of the year is usually positive for the yellow metal.

Decline in Bond Yields Helped Gold

However, the gold didn’t move up just on the bullish momentum. There was also a fundamental driver, i.e., the bond yields declined yesterday, which increased the attractiveness of non-yield-bearing assets such as gold.

More generally, recessionary risk and the upcoming end of the Fed’s tightening cycle should make 2023 a positive year for the precious metals. This week, we will get to know the minutes of the last FOMC meeting. If they contain any dovish hints, there could be room for further increases in the price of gold. Conversely, hawkish signals could trigger a correction in the gold market.

Implications for Gold

What does it all imply for the gold (and silver) market in 2023? Well, the US monetary policy should remain the key driver of gold prices. In 2022, the aggressive hikes in interest rates created strong downward pressure. Without similar pressure in 2023, the price of gold could go up more freely.

The Fed’s pivot this year is almost certain. Why? Well, as the chart below shows, the growth rate in the broad money supply turned negative. It means that the money supply declined – for the first time in many years. This is a red flag for economic growth – actually, it’s another signal of an upcoming recession.

As a reminder, the money supply declined significantly during the Great Depression, which was one of the reasons why it was so severe. So, the Fed won’t allow this trend to continue for too long and change its stance, which should eventually boost gold prices.

Arkadiusz Sieron, PhD