In recent years, with the money supply massively increasing and the oil price rising, inflation began to soar. The US Federal Reserve has been tightening to get this under control for several months now, seeing the interest rate climb from close to zero to 4.5%. However, the coming months will reveal whether this strategy is working. While financial markets don’t like inflation, safe-haven assets such as gold tend to thrive, and the question is, will gold make a good investment in 2023?
Gold as an Inflation Hedge
Precious metals such as gold and silver have been the world’s best inflation hedges for hundreds of years. But today, they have competition in cryptocurrency and various economic cogs working against them.
US financial markets are in a state of uncertainty, spurred by US stimulus, a meme stock frenzy, an unprecedented rise in derivatives trading and geopolitical tensions between the US and China and the Russia-Ukraine war.
Early in February 2023, the likelihood of a Fed rate-hike deceleration was derailed as a Bureau of Labor jobs report shocked with a much healthier jobs market than expected.
Now economists and investors are back to debating whether interest rate hikes will continue or not.
This makes accurate gold price prediction difficult, but where there’s uncertainty, gold often thrives. And many think there’s good reason to believe demand for precious metals is set to increase.
That’s why investors looking to differentiate their portfolios are increasingly looking at gold and considering whether they should invest.
Fundamentals of Gold
In March 2022 the gold price hit $2000 an ounce after months of speculation. But the rate hikes have since pressured it as institutional investors, tempted by higher bond yields, sold off their gold.
When the value of the dollar falls, traditionally this has led the gold price to rise. The dollar rallied spectacularly last year and only began a pullback from October, not long before gold began to rally.
What Is the Price of Gold Today?
Today, the price of gold is hovering around $1,881 per troy ounce. The month has seen a high of $1,964.59 and a low of $1,861.79, and it’s been in an uptrend since November 2022.
In January 2023, gold enjoyed the best start to a year since 2015 as spot gold rose 5.72% to close January at $1,928.36. Sprott said gold bullion trading desks have confirmed this strong start to the year is a continuation of flow demand from China since early November 2022.
Uncertainty in the markets is undoubtedly the best time to buy gold, and with so much of that going around, it would seem a fair bet that gold will continue to rise.
Today, yield curve inversion is another indicator to watch. This month, the two-year Treasury yield traded at 4.2%, closing in on the 10-year yield at 3.4%. This pattern has preceded every US recession in the past 50 years.
A recession may boost demand for gold, but interest rates higher for longer could be detrimental to its value.
UBS commodity analyst Giovanni Staunovo, says:
“We believe in 2023 there will be a period where it’s interesting to buy gold when the market starts to smell that the Fed will cut interest rates.”
What Is the Bull Case for Gold?
Gold has always been seen as a good investment asset to have as part of a balanced portfolio. It boasts strong liquidity in the commodity markets and, more often than not, increases in value over time, although this growth may take a significant length of time.
The price of gold since the pandemic hit has gone a long way to further reinforce its utility as a hedge to the S&P 500. In 2020 when the stock markets crashed, gold hit new highs not seen since 2012, with many analysts predicting further growth in the coming months and years.
During economic uncertainty, investment in gold is seen as a safe haven for investors and can be a good way to diversify portfolios and reduce exposure to risk.
What Is the Bear Case for Gold?
The price of gold can fluctuate significantly over a short period of time and can take a long time to rise. Big declines can be difficult for investors to deal with, and many lose confidence. Investing in gold is certainly a long game and may not be suited to those looking for quick gains.
Another factor to consider is the competition from cryptocurrencies. The likes of Bitcoin remain popular with younger investors, with many shunning gold for modern, digital commodities.
If interest in cryptocurrencies or central bank digital currencies grows, then confidence and sentiment for precious metals such as gold and silver could fall, leading to low prices that could take years to recover.
As we already mentioned, gold is a long-term investment, but for traders, cryptocurrencies can offer quick gains and also help with portfolio diversification. As more is understood about them and as they become more widely accepted as an investment option, crypto could be seen as the new investment safe haven, an accolade once reserved for gold.
Should I Invest in Gold?
As with all investments, gold investing does have its risks, the main one being that it could fall in value and doesn’t come with any yield to sweeten the deal. While it has always increased in the past, there is no guarantee it will do so in the future. Whether buying physical gold or investing in gold-related securities, it is crucial that you understand what you are buying as capital could be lost.
For those looking for short-term gains, gold is possibly not the investment for you. However, if you are looking for a long-term investment and to diversify your portfolio, then gold may be worth considering.
According to the World Gold Council, gold has proved its value during economic recessions, delivering positive returns in five of the last seven since 1973, including the 2008 global financial crisis and the COVID-19 pandemic of 2020. A fact worth bearing in mind.