Originally published on 3/1/2023
When the rates of inflation start to rise, many people look for investment alternatives and gold is often a go-to. Gold is often considered to be inflation proof, but the price of gold does fluctuate. In fact, in recent years, gold prices have seen significant price changes.
From 2018, the price of gold increased year on year by 18.8% and 24.43% respectively over 2019 and 2020. However, in 2021, the year on year price difference went down to -3.51% increasing to -0.23% in 2022. So, what does this mean for the gold price in 2023?
Here we’ll delve into gold price forecast 2023 and what factors look set to influence the prices of gold in the coming months.
Why Gold Prices May Increase in 2023
There are a number of factors, which support our opinion that the price of gold will increase in 2023. These include:
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Inflation
Inflation impacts the cost of consumer goods. When inflation rises, the cost of goods increases and therefore the dollar loses real world value. As gold is dollar denominated, its prices can be impacted by changes in the rate of inflation.
As many people are aware, inflation reached record levels in the U.S and other areas of the world over the last 12 months, which means that the price of gold has followed suit.
After all, there is not much sense in tying your money up in a bond or CD offering 5%, when inflation is at 10%. Most savvy investors are aware that when inflation is on the rise, the real value of money decreases, so the price of gold and other commodities is anticipated to increase.
Of course, gold is a limited resource and it has no dependence on a central bank, so since inflation is high in 2023, we anticipate the price of gold to increase accordingly.
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Decentralized Currencies: Crypto Is Not A Real Alternative
In periods of uncertainty and high inflation, many people look to alternative investment products including decentralized currencies.
The only alternative to gold and commodities is Cryptocurrencies. However, the crypto market is far from being mature – regulations, fraudulent activities and other issues make it a big challenge for the average investor.
So, the price of gold is likely to increase over the alternatives and investors will revert back to other stable commodities, thereby increasing demand and driving up the price.
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Inflationary Recession
According to the World Bank, there is an increased risk of a global recession. In a January 2023 report, the World Bank stated that there is a period of pronounced weakness in the United States, China and the euro area, and the resulting spillovers are likely to exacerbate other economies.
When a recession is looming, uncertainty increase and may drive gold price up as well. As with high inflation, a recession can impact the financial market, so investors look for “safe” places to hold their funds.
This increased demand is highly likely to drive the price of gold upwards. So, as the threat of recession looms ever more present, gold prices look set to continue to rise.
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Bankruptcy of Countries
This follows from the previous point, but as the financial situation worsens, more countries become at risk of bankruptcy, which exacerbates global uncertainty.
The higher FED rates bring a strong dollar, which is already affecting many developing economies. If the situation will keep escalating, there is a risk of bankruptcy for many of them.
If countries are looking at bankruptcy, their currency effectively becomes worthless both internally and in the wider global economy. This means that consumers will need to rely on a more stable commodity like gold.
This will lead to greater demand for gold and since gold is a finite resource, the prices will increase. Currently, there are approximately a dozen countries at risk of bankruptcy, which means that consumers in those economies and associated economies are more likely to rely on gold.
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Geopolitics
As many people are aware the Ukraine/Russia war has created ripples around the world including in the economy. While the most obvious area is in food and fuel shortages in Europe, this conflict has also impacted gold prices.
During times of geopolitical fears and increased tensions, investors and central banks tend to start to hoard gold as a stable investment to protect against inflation and economic uncertainty. At the time of writing this article, the Ukraine/Russia conflict has entered into its second year and there are concerns that additional incidents may escalate the conflict, creating further uncertainty.
As there is currently no end in sight for the Ukraine conflict and the potential for other countries to become more actively involved increases, the geopolitical situation is tentative, which is likely to fuel greater demand for gold and cause the gold price to increase throughout 2023.
The Factors That Can Drive Gold Down
Conversely, there are a number of actors which have the potential to drive down gold prices in 2023. These include:
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Higher Interest Rates
Interest rates have an inverse influence on gold prices in the long term. For example, when the FED cut interest rates during the Covid pandemic in 2020, gold prices rose significantly. When the rates in the U.S hit bottom, the price of gold leveled off, moving sideways when the FED guidance indicated the rates would stay close to zero for the foreseeable future.
Since the FED uses interest rates to try to maintain optimal inflation rates, there is the potential for gold prices to drop. Investors have an alternative – instead of investing in gold that don't drive any interest, they can put their money in the bank and get high interest.
As inflation continues to increase, the FED is likely to continue to impose interest rate increases, which is likely to cause gold prices to stagnate or drop. In this scenario, consumers are likely to look to capitalize on the higher interest rates by locking in rates with interest bearing securities.
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Significantly Lower Inflation
If the FED policies take effect and the rate of inflation begins to significantly lower, this will also have an impact on gold prices. As we discussed earlier, inflation and gold prices have a correlation, so if the rate of inflation significantly drops, we can expect gold prices to also drop.
While there are no predictions for significantly lower inflation in 2023, the FED and U.S government may impose new economic policy to address the cost of living crisis, causing inflation to drop.
Buying Gold Pros and Cons
As we’ve covered, there are both risks and benefits of buying gold, so it is important to highlight these pros and cons to make an informed investment decision.
Pros | Cons |
|---|---|
Potential Hedge Against Inflation | High Deposit Interest |
Diversification Opportunities | Fear Based Decisions |
Turbulent Economic Conditions Hedge | Potential Performance Lag in the Long Term |
- Potential Hedge Against Inflation
Since inflation reduces the buying power of cash, if you want to hedge against this, you’ll need a stable asset class like gold.
As we’ve discussed, gold prices and inflation have a correlated relationship, so as inflation increases, gold prices are likely to rise, making a sound investment.
- Turbulent Economic Conditions Hedge
As we’ve covered, buying gold has the potential to help investors when there are turbulent economic conditions.
When there are pessimistic expectations in the market, gold is a viable investment tool.
- Diversification Opportunities
Gold or other precious metals can also be used to diversify your portfolio and ensure you have more asset classes in your investment strategies.
In the right allocation, investing in gold can make sense to balance your portfolio, depending on your volatility tolerance and time horizon.
- Tangible Asset
Unlike other investment, you can buy physical gold and hold it – it's a tangible asset you can see and feel, bringing certainty and safety.
However, physical gold has drawbacks you should consider such as storage and stealing.
- Potential Performance Lag in the Long Term
Although gold typically outpaces other assets particularly in the scenarios we’ve discussed above, it may not provide long term price appreciation.
For example, in 2022, the S&P 500 index dropped more than popular gold ETFs, but when you compare them on a five year basis, you’ll see that the stock index climbed far higher.
- Fear Based Decisions
Most successful investors appreciate that making decisions based on fear is never a good investment strategy.
When the market is shaky, there is a tendency to turn to gold as a consequence of fear rather than considering long term success.
- High Deposit Interest
As FED rate goes higher, you can get 4-5% on savings accounts or CDs with no risk. Gold doesn't provide interest with no risk such as deposits.
Summary: Can We See Gold Price At $5,000?
While it may not happen in 2023, I definitely see a chance the gold price will go higher, even to $5,000 and more, in 2024 or 2025.
There are no guarantees in investing and as I’ve covered there are both pros and cons associated with investing in gold. While we predict a bullish gold market, it is important not to have overreliance on gold in your investment strategy.
Be sure to consider the long term impact on your portfolio and investment goals before you make a decision.
Note: All information and data in this article is solely for informational purposes and reflect the writer opinion only. The Smart Investor is not a financial advisor. It's recommended to consult with a financial advisor before any investing decision.
