Is Gold Ready To Fly Or Will The Fed Clip Its Wings

(December 9,2022-Kitco)

After November's massive rally, we are finally starting to see some follow-through buying in the gold market as prices end the week at a four-month high above $1,800 an ounce.

One comment that keeps popping up among market analysts is that gold, while not entirely out of the woods just yet, is now a "buy the dip" asset. This is a marked shift from the summer when the play was "sell the rally."

The short squeeze in November, followed by the December gains, has pushed gold prices into roughly neutral territory for the year with a loss of 1%. For comparison, the S&P 500 is down 17% year-to-date.

For many gold investors, 2022 has been a disappointing year. Despite an extraordinary rise in inflation, gold has seen lackluster investment demand. Gold's utility as an inflation hedge couldn't overcome the headwinds of a strong U.S. dollar as the Federal Reserve was forced to raise interest rates at the fastest pace in more than 40 years.

Despite gold's price action, Juan Carlos Artigas, global head of research at the World Gold Council, said that the precious metal has done its job as a portfolio diversifier.

"Investors who had gold in their portfolio in 2022 would have seen better returns, fewer losses and less volatility," he said in an interview with Kitco News. We expect that will continue to be the case in 2023."

In its forecast published Thursday, the WGC said it expects to see a relatively stable gold price in 2023 in the face of significant economic uncertainty.

Although sentiment is changing in the precious metal space, there is still one last hurdle to get through. The Federal Reserve's last monetary policy meeting of 2022. Next week the U.S. central bank will set the tone for the new year.

It is expected that the Fed will be less aggressive with a 50-basis point rate hike; however, according to many analysts, the risk for gold is the central bank's dot plots.

In September, the Federal Reserve saw the Fed Funds rate peaking in 2023 at 4.6%; those projections are expected to move closer to, if not above, 5%. If the terminal rate goes materially above 5%, then gold prices could see some new headwinds as the U.S. dollar pushes higher.

However, on the other side of the argument are analysts saying that further aggressive action from the Federal Reserve will only push the economy into a deeper prolonged recession.

At the same time, gold is more than the sum of its investment demand. Central bank demand for the precious metal has grabbed market attention for the past month and we learned that China is again buying.

Wednesday, the People's Bank of China announced that it bought 32 tonnes of gold in November, the first time it has increased its official reserves since September 2019.

Some analysts have said this further proves that the dedollarization trend continues to pick up steam.

"As deglobalization accelerates, non-G-10 nations are expected to 're-commoditize' and ramp up gold holdings; the de-dollarization narrative is gaining traction," said Nicky Shiels, head of metals strategy at MKS PAMP in reaction to China's gold purchases.