Is Gold Set To Soar In 2023? Examining The Market Conditions

Gold prices have been on a wild ride since the start of 2023, experiencing more ups than downs in less than three months. The recent global financial crisis has once again made gold a safe haven for investors, pushing it past $2,000 per ounce briefly. With ongoing geopolitical tensions, interest rate hikes, and fears of a banking crisis, the future of gold prices in 2023 is uncertain but exciting, says bullion analyst Sanjiv Arole.

“Runs ’n Ruins” was the title of the book by cricket legend Sunil Gavaskar that depicted his travails during 1983. It was the year of great ups and more downs for Gavaskar. The only silver lining was the World Cup win, but Gavaskar had a poor outing during the victory campaign. In a mediocre year, by his standards, the only high points during the year were laying the foundation at Berbice for India’s first ever win in ODIs over the Windies and scoring his 29th and 30th test hundreds, towards the year end. In many ways, gold too has begun the year 2023 in much the same way.

It has been a roller-coaster ride for the yellow metal in less than three months since the beginning of the year, with more ups than downs so far this year. Gold opened the year 2023, with a $20 per ounce jump over the 2022 year end price, at $1835.05 per ounce. Then, it soared by over 6% to $1,954.90 per ounce on 2nd February, 2023 when the US Fed announced just a 0.25% hike in interest rate. In fact, during the day, the gold price was closer to the $2,000 per ounce levels. However, the Fed chief Jerome Powell’s assertion once again, that the Fed would keep up with its target of bringing inflation down to 2% as its long-term goal, triggered a relapse as the gold price then began its downward slide in the remainder of the month. So much so that gold slumped $1,809.05 per ounce on 27th February, 2023, the lowest in the year so far, intra-day the gold price appeared to head not only towards $1,800 per ounce, but even $1,750 per ounce seemed to be within reach.

Thereafter, for a while gold vacillated between around $1,850 per ounce and $1,809 per ounce till the global financial system was rocked by the collapse of the Silicon Valley Bank (SVB) on 10th March, 2023 in the US. Ostensibly, this was a reaction to the high octane hike in interest rates regime unleashed by the US Fed over the last year or so. Quite suddenly, this snowballed with two more banks in the US collapsing, thus making it the biggest financial crises since the Lehman Brothers collapse that had triggered the global meltdown in 2008. The global stock markets went into frenzy and declined worldwide. Then, gold came to the forefront as a safe haven and crossed the $1,900 per ounce mark by the 13th of March and scaled a high of $1981.95 per ounce (London am fix) on the 20th of March, 2023. The yellow metal scaled $2011 per ounce very briefly on the same day, intra-day in New York.

The rapid decline of the Credit Suisse in the next few days and its subsequent takeover by the UBS has made the markets very jittery indeed. Furthermore, after the second 0.25% hike in interest rates, Jerome Powell stated that the Fed was considering a pause in interest rate hikes due to the collapse of three US banks and the acquisition of Credit Suisse by UBS. The prevailing market turmoil saw gold once again zoom ahead and briefly cross the $2,000 per ounce mark once again on 23rd March, 2023. The yellow metal ended the week at $1,993.80 per ounce (Friday, London pm fix). However, it ended much lower at $1,978.20 per ounce in New York, but not before briefly flirting with $2,004.30 per ounce there. It would seem that the decline in price was caused by higher-than-expected economic data from the US and the hawkish stance of the Fed governor, who stated that the interest rate hike regime would continue once the banking crisis subsides. One can expect more choppy seas for the entire precious metals basket, but with an upward bias.

Currently, it would seem that gold could scale fresh highs if the present market conditions prevail during the year. The following could determine the future of the gold price in 2023.

(a) The ongoing Ukraine war seems nowhere nearing its end. In fact, following the US-led NATO allies’ pledge to provide tanks, aircrafts and other military hardware and the recent visit by China’s premier Xi to Moscow could mean that the war is not getting over anytime soon. The never-ending war could only propel gold forward.
(b) The indication by Jerome Powell that prevailing market conditions could force the Fed to pause its regime of interest rate hikes, even if the target of 2% inflation is not met. This could give a big boost to gold.
(c) At the back of the mind would be growing fear that the banking crises could blow up into a full-blown financial meltdown like 2008. In such a scenario, gold could lift off to the stratosphere.
(d) Gold could only benefit if US inflation remains much above the Fed target of 2%.
(e) The demand for physical gold from investors would mainly depend on economic conditions in countries like India and China, in particular. Market turmoil could mean that the commodity exchanges would be very active.
(f) Investors could flock to gold ETFs should the banking crises deepen. Even otherwise, gold ETFs have been in demand.
(g) The continued interest in gold purchases by Central Banks.

However, if (a big if) the Ukraine war ends soon and should the banking crises not blow up into a 2008-like scenario and dissipate into “a storm in a tea-cup”, then, gold could not only lose its gains and its shine, but, Jerome Powell would be back in the saddle with his “sword of Damocles” (over gold) to slay the inflation dragon with his only favourite weapon, hike in interest rates. In that scenario, gold could be on a steep slide going only one way – down!

Elsewhere, this year’s LBMA gold price forecast revealed that analysts are cautiously optimistic about gold and even silver prices in 2023, forecasting the average gold price for 2023 to be 3.3% higher than the average gold price for 2022. The 43 global analysts predicted the average gold price at $1,859.90 per ounce in 2023 compared to the actual average price of $1,800.09 per ounce in 2022. The analysts’ highest price prediction was $2,200 per ounce while the lowest price prediction was $1,445 per ounce.

Gold is forecast to trade in a $755 per ounce range, with the most bullish average price forecast being $2,025 per ounce and the bearish average price forecast being $1,594 per ounce. In spite of the upheaval in the gold price last year with a trading range of $785 per ounce, the difference between the actual average gold price and the average price predicted by analysts in 2022 was a just $1 per ounce only. More surprisingly, the winner’s prediction was just a mere 9 cents off target. Given the already roller-coaster ride for gold, in the first three months of the year, one can expect another unpredictable result by the end of the year.

Meanwhile, in the domestic markets, as gold crossed all-time high levels ₹60,000 per 10 gms, demand was very subdued. As a result, the Gudhi Padwa/Ugadi/Chheti festival did not appear to attract many buyers. Even the IIJS Tritya at Bangalore seemed to have been slightly impacted by the all-time high gold price in the domestic market.

In 2022, according to the WGC, the Indian demand for gold was fairly strong, but fell shy of the 2021 ‘comeback’ from the pandemic demand. In fact, imports were down by around 25%, but a sharp rise in scrap inflows saw total supply down by around 20%. Jewellery demand was down by 2% and investment demand in bars and coins was down by 7%. The RBI too added 33 tonnes of gold. Gold’s performance during 2022 could be termed as satisfactory in the wake of greater price volatility, with a high of well over $2,000 per ounce and low of around $1,628 per ounce.

Finally, the question to ask is: Will India remain immune this time as well to the looming financial crises as compared to the 1996-97 east-Asian currency crises or the Lehman Brothers-induced global financial meltdown? For, while in the past when both the urban and rural poor, including small farmers, were able to buy gold and silver from their savings. Now, it is not so easy for anyone to buy physical gold or silver as easily or cheaply as before. The primary reason is the very high import duty of around 15% plus the GST of 3%. This when compared to the scenario just prior to 2008 is quite revealing. Then, the gold price had just begun to move from just around ₹6,000 per 10 gms in 2006 to ₹12,000 per 10 gms in 2008 with the import duty being just ₹100 per 10 gms for serialised pre-numbered bars of metric weight.

Even the GDP growth was fairly good and the economy fairly robust. As a result, income levels kept pace with the rise in gold prices to some extent. Currently, post-Covid 19 disruptions in income levels means that income levels have not kept pace with the gold price coupled with duties and other levies on gold. Currently, gold is at least 5 times the average price in 2008, while the duties and levies are up several times. This makes gold, in particular, out of reach of most of the poor as well as the lower middle-class groups.

Then, it is more difficult to procure gold due to restrictions on cash purchases and the presence of an audit trail. These restrictions have been put in place to curb money laundering as well as tax evasion and corruption. However, as income from agriculture is beyond the tax ambit, most of the smaller farmers, etc., have to endure discomfort in using their legitimate income as they want. Then, the advent of digital gold, gold ETFs and the Sovereign Gold Bond means that physical gold is being pushed into the background.

Given the above scenario, will the middle-class and poor populace have a safety net in physical gold holdings if the current banking crises snowballs into a 2008-like scenario? It seems unlikely, but time should tell!


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