We witnessed a historic tightening cycle of the Federal Reserve in 2022. However, after that, a recession or a significant economic slowdown is quite likely. However, will this be good for gold prices?
“This backdrop is typically positive for gold prices”
For most of 2022, an aggressive Fed, combined with a strong US dollar, put a price cap on any potential rally to suppress gold. Daniel Hynes, senior commodity strategist at the Australia and New Zealand Banking Group (ANZ), comments:
The strengthening USD also put the precious metals sector under pressure. Gold prices fell with the drop in investor demand. Concurrent interest rate hikes weighed on gold in 2022.
Year-to-date, spot gold prices are almost flat, down 0.3%. However, gold rallied from a low of $1,750 at the beginning of the month to $1,830 on Tuesday. Thus, the December rally helped gold maintain its annual altitude. The year-end gold price rally comes when the global economy is at a crossroads. Hynes says:
Tighter monetary policies amid high inflation are likely to slow economic growth in 2023. This ground is typically positive for gold.
“Gold outperforms others during this period”
cryptocoin.comAs you follow, the Fed increased interest rates by 50 basis points at its December meeting. Thus, the total increases during the year reached 425 basis points. The current median forecast for next year is likely to increase rates as high as 5.1%. Also, Fed Chairman Jerome Powell says rates will remain high ‘for a while’.
ANZ expects the US federal funds rate to peak at 5%, followed by a pause in rate growth. Hynes adds that this should tip the market sentiment in favor of gold. And the US dollar will play a big role in helping gold rise. In this context, Hynes makes the following assessment:
This comes at a time when we are nearing the end of US dollar dominance. Also, a depreciation in the currency would provide further support to investor demand. With the Fed proposing that interest rates will stay high through 2023, there is a risk of weak economic growth next year. Gold prices tend to come under pressure before the recession. However, it outperforms other markets (such as stocks) during this period.
Technical analysis: Gold prices will likely take a pullback, but…
Market analyst Anil Panchal analyzes the technical outlook for gold as follows. Gold prices are pointing to a U-turn from a five-week ascending resistance line. Moreover, the RSI (14) is pulling back from the overbought region, which is adding strength to the short-term bearish bias. However, the convergence of the 21 and 50 Simple Moving Averages (SMA) near $1,795 is likely to further constrain the metal’s downside action. However, $1,800 is acting as support.
In a situation where the gold price drops below $1,795, the convergence of the 100-SMA and an upslope support line near $1,787 from Nov. Alternatively, an upside break from the close resistance line near $1,825 would need confirmation from the two-week resistance line near $1,836 to entice gold buyers.
Following this, the highs marked around $1,880 in June will be in focus for gold bulls. Overall, gold will likely witness a pullback. However, the uptrend remains on the table.
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