The 1900$ level was an extremely important psychological threshold for gold to cross. What we are seeing is history in the making.
Can you hear it? This sound of champagne being uncorked and a joyful toast? I think it comes from the party of gold bulls who are celebrating the rally in gold prices. As the chart below shows (courtesy of goldpriceforecast.com), the price of gold jumped above $1,900 on Friday (January 13, 2023). It’s a psychologically important level, so there are reasons to cheer. Also, by reaching $1,910, gold reached the level not seen since April 2022 and already gained 5.4% in 2023. And we are still in the first half of the first month of this year!
What Happened?
Why did the price of gold jump? Well, as the chart above shows, the yellow metal has been in an upward trend since its bottom of $1,629 in November 2022, gaining 17.3% up to date. The reason is a change in the macroeconomic context and, as a result, in market expectations. In short, inflation has peaked, while the Fed has come close to the peak in the federal funds rate. Also, a recession is approaching us. All these fundamental factors led the markets to expect the near end of the Fed’s tightening cycle and to even forecast the pivot and cuts in the interest rates this year.
When it comes to the more immediate reason behind gold’s recent jump above $1,900, I have to point out the recent CPI report, which showed a significant reduction in the inflation rates. It raised hopes for lower interest rate hikes and less hawkish monetary policy. Yellen’s warnings about hitting the statutory debt limit by the U.S. on January 19, 2023, could be another bullish driver that increased the safe-haven demand for gold somewhat.
Implications for Gold
What does it all imply for the gold (and silver) market in 2023? What’s next after crossing $1,900? Well, the gold market could be seen as overbought in the short term, so I wouldn’t be surprised by a correction. However, given the bullish sentiment, it doesn’t have to be very deep.
And given the fundamental change in the marketplace – namely, the Fed ending its tightening cycle – I believe that gold should generally continue its upward move in the medium and long term. A lot will depend, of course, on the Fed’s actions and rhetoric, but the fundamental outlook remains bullish. I think that $2,000 is within the reach of gold in the upcoming weeks or months unless inflation goes up again or the U.S. central bank surprises us on the hawkish side.
Arkadiusz Sieron, PhD