Will Gold Be a Good Investment in 2023?

The Spotlight

10 minutes read

Nov 8, 2022

A cartoon man climbing up fine gold bars on a yellow background, representing the gold price going up

With a recession looming and inflation still at decades-high levels, it may be a good time to start growing your gold savings. Here’s what you need to know about investing in gold in 2023.

Let’s be honest, it has been quite a challenging year for gold.

There were a number of factors influencing the gold price in 2022, including rampant inflation, rising interest rates, and lingering geopolitical tensions.

As we are nearing the end of the year, you may be wondering:

What will happen to gold in 2023?

While there’s no definite answer to this question, we will try to give you an idea of where the price of gold could go next year.

In this SPOTLIGHT, you will learn:

So let’s start.

What happened to the price of gold in 2022?

As with any other asset, it has been a year of ups and downs for gold.

In early March, the price of gold surged above $2,000 to its highest level since 2020, as the war in Ukraine pushed investors to seek protection from rising geopolitical risks and high inflation.

Since then, however, other factors have come into play, making gold lose some of its gains. We call them the Fed effect.

The U.S. central bank has started aggressively hiking interest rates to curb stubbornly high inflation, pushing the U.S. dollar to its highest level in two decades.

💡What are the main drivers of the gold price?

  1. US dollar: a weaker US dollar will most likely push the gold price higher, and vice-versa.
  2. Monetary policy and Fed moves: there’s a general belief that the gold price usually rises when interest rates fall and vice versa. However, some historical data show that it’s not always true.
  3. Market uncertainty and inflation: when economic conditions worsen and inflation rises, the gold price often moves higher.
  4. Investor sentiment: investors moving their capital in or out of gold can move the gold price and create momentum in the market.
  5. Supply and demand: this includes central bank buying, mine production, and seasonal consumption.

The gold price stabilized by mid-May, supported by high inflation and geopolitical tensions. In September, it dropped 2.6%, mostly because of the surging U.S. dollar and the Fed keeping up with its aggressive rate-hike policies.

While these two factors weighed heavily on the gold price, some investors still think gold could have done better, especially with surging global inflation.

💡Did you know?

In U.S. dollars, gold has been down by about 10% so far this year, but in euros and yen, it's up around 5% and 10%, respectively.

A similar disparity between dollar gold and euro gold already occurred in 1999. Back then, it paved the way for gold prices to rally.

"Aggressive Fed tightening to address inflation and elevated asset prices — which is buoying the greenback, as the rest of the world tries to catch up — echoes trends about two decades ago. Underpinnings are firming for the price of gold to resume the rally that started with that base,” Bloomberg Intelligence senior commodity strategist, Mike McGlone, says.

A cartoon man inflating a yellow balloon with a dollar sign, representing the growing U.S. dollar amid rising rates

As you know, rising rates and a strong dollar are often considered gold’s arch nemeses ☠️. That’s in part because gold and other precious metals are traded in dollars. Therefore, a stronger dollar makes gold more expensive for foreign investors to buy in. As a result, the gold price declines due to weaker investor demand.

Reason #2: Investors believed the Fed would eventually have inflation under control.

Yes, you read that right. Even though inflation is soaring, some investors still believe the Fed would successfully bring it down. (Not everyone agrees, though 🤓).

Take a look at the chart below:

A graph showing bond investors' expectations for long-term inflation and U.S. CPI between June 2021 and August 2022.
U.S. bond investors expect the Fed to bring inflation down successfully. Source: Bloomberg, World Gold Council.

The graph shows the difference between the U.S. Consumer Price Index and long-term inflation expectations (known as the five-year/five-year forward gauge) expressed by U.S. bond market investors.

Essentially, this graph tells us that some investors see inflation stabilizing over time, even though it's still very high now.

Now, let’s go back to gold.

Gold is an “emotional asset” that reflects investors' feelings about certain market events, including inflation. The gold price reflects these feelings too.

So, naturally, gold didn't rise as much as expected in response to high inflation because some investors perceived it as less of a risk in the future.

But it doesn’t mean gold has performed poorly this year. Quite the contrary, gold held up quite well despite all the pressure coming from the surging dollar and rising rates, according to the Global Head of Research at the World Gold Council, Juan Carlos Artigas.

To explain why we will use a simple model for gold.

💡What is a simple model for gold?

A simple model assumes that the gold price is almost exclusively determined on the basis of U.S. financial indicators, namely real rates and the dollar.

The chart below suggests that the gold price should have fallen by more than 30% by now if it was only determined by interest rates and the dollar. But it didn’t. In reality, the gold price was higher than the simple model predicted.

A graph showing the simple gold model based on real rates and U.S dollar and the actual gold price between August 2017 and August 2022.
The red line shows the gold price based on the simple model, while the golden line shows the actual gold price between August 2017 and August 2022. Source: World Gold Council, Bloomberg, ICE Benchmark Administration.

Overall, this graph tells us 3 things:

  1. Gold is resilient to the effects of the so-called “negative drivers”, including a strong dollar.
  2. Gold really reacts to its “positive drivers,” such as inflation and geopolitical risks.
  3. There’s room for the gold price to go up if positive price drivers stay in place.

Will the gold price go up in 2023?

Even though the surge in the U.S. dollar is likely to remain an obstacle, there are some positive signs for the gold price.

Sign #1: Central bank buying is strong

Central banks ♥️ gold in 2022. According to the World Gold Council, central bank demand for gold hit a 55-year high, up 383% from last year:

A World Gold Council graph showing central bank gold demand that hit a 55-year high in 2022.
Central bank gold demand soared to a 55-year high, reaching 700 tons in 2022.

Such a steep spike in purchases shows that gold remains an indispensable asset for central banks, a trend that could continue in 2023.

And, as you know, greater interest from central banks will end up impacting the price of gold, often driving it up.

Sign #2: Looming recession

A cartoon man in a blue suit balancing on a dice

Hit by the energy crisis, half of the Eurozone countries are now heading for a recession, and the U.S. could soon be there, too. This could be a good sign for gold.

There’s a general agreement, that during a recession, riskier assets like stocks and high-yield bonds tend to go down, while gold and U.S. Treasuries usually increase.

According to Goldman Sachs, the gold price may go up if the U.S. economy slides into a recession and the Fed cuts rates.

As shown in one of their scenarios, there’s a 30% chance of a recession with substantial rate cuts to zero by 2025 that would see the price of gold jump to $2,250 an ounce.

"Gold's downside in the case of a 'soft landing' or further Fed hawkishness is significantly less than gold's upside in the case of a growth shock that pushes the U.S. economy into a recession," the analysts said in a note.

Sign #3: The impact of rising rates seems to be fading

a concerned cartoon man looking at a dropping economic indicator representing the fading impact of rising rates on the gold price

Investors seem less worried about rising rates and their impact on gold as they expect them to get lower in the future.

“Gold investors now view policy rate rises as less of a threat to gold than before. They appear to have accepted Fed hawkishness and its terminal rate forecast. In addition, their sensitivity to Federal Market Open Committee (FOMC) announcements has fallen, and […] forward rate expectations signal a consensus expectation for lower rates ahead,” the World Gold Council said in its market commentary.

This could mean that, in the future, rates might be less of a hurdle for the gold price, letting some of its supporting factors take center stage.

So, should you buy gold?

Well, no one knows for sure, since everything depends on your investment strategy and personal needs. But if you think you should buy gold, here is one thing to keep in mind:

Picking the right time to do it can be tricky since gold prices are hard to predict. As you have seen in this SPOTLIGHT, the price of gold can be influenced by multiple factors at the same time. And this is exactly what happened this year:

  • The gold price soared in early March, driven by fears about the consequences of Russia’s invasion of Ukraine and high inflation.
  • In the meantime, the Fed was increasing interest rates, driving the U.S. dollar to a 2-decade high, which ultimately pushed the gold price down.

Despite all that, gold has remained resilient to these pressures, leaving room for potential future price increases.

So if you feel like now could be a good time to start growing your gold savings, check out our SPOTLIGHT for a simple strategy that can help you choose the right time to buy gold.


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