Gold ends this year almost where it started. Will we see the same thing at the end of 2023?
2022 was a year of inflation and the Fed’s tightening cycle. What can we expect from the new year?
- Reduction in inflation. The inflation rate has already peaked and started to decline. It should moderate further in 2023.
- Recession. We should see very sluggish economic growth or even a decline in the GDP. Some asset bubbles have already burst. Recession is widely expected in 2023, which could be actually used as an argument that it won’t happen. Still, the very aggressive Fed’s tightening cycle will likely trigger an economic downturn. The fight with such high inflation always ended with a recession, and this is also what the reversal in the yield curve suggests.
- Stagflation. Thus, when we add lower but still relatively elevated inflation with a recession, we’ll obtain stagflation. Some analysts are betting on quick disinflation, but that seems inconsistent with their estimates of fiscal deficit spending and GDP growth. Our dataset is limited, but the stagflationary 1970s were positive for gold prices.
- The Fed’s Dovish U-turn. Disinflation and deteriorating economic growth will prompt the Fed to end the interest rate hikes and, later in 2023, to actually cut the federal funds rates. In 2021, the Fed reacted too slowly to high inflation. In 2023, it will react too slowly to the economic slowdown. But at some point, the Fed will wake up and adopt a dovish stance.
- Real Interest Rates Decline. Hence, although inflation will moderate, the real interest rates should decrease in 2023. Real rates are a key gold price driver, so their decline should boost the yellow metal.
Implications for Gold
What does it all imply for the gold (and silver) market in 2023? Well, the above points clearly indicate that 2023 should be a better year for the yellow metal. As the chart below shows, the price of gold ended the year near the levels at which it started in 2022.
Thus, while the passing year was neutral for gold (but, when compared to many other assets, it was a quite positive time), the next twelve months should be favorable for the yellow metal. Of course, there will be – as always – both ups and down, but when the recession sets in for good and the Fed pivots, gold should rally.
Arkadiusz Sieron, PhD