Gold price looks set to close 2022 stable around $1,800. According to market analyst Eren Şengezer, the Fed’s policy outlook and the performance of the Chinese economy will affect gold in 2023. The analyst also says that the market position and technical outlook suggest that gold will likely continue to rise next year. Eren Şengezer offers a 2023 panorama for the price of gold.
2023 outlook for gold price
The course of US inflation
CME Group’s FedWatch Tool shows that markets are pricing the Fed’s 25bps hikes in February and March as 52.4% likely. If this happens, the policy rate will be 4.75%-5%. Thus, it will be slightly below the final ratio projection on the dot chart. FOMC Chairman Jerome Powell spoke at the post-meeting press conference in December. Powell acknowledged that the peak rate could drop if inflation data continues to soften. Powell noted that they expect housing inflation to decline in 2023, but that inflation is still uncomfortably high in the non-residential services sector, which is mainly linked to the labor market and wages. Finally, Powell announced that they do not plan to lower the policy rate in 2023. He also reiterated that none of the policy makers are planning a rate cut in the SEP next year.
In the first quarter of the year, wage inflation and consumer inflation data will be closely watched by market participants. If wage inflation begins to moderate in early 2023 and the CPI continues to fall, it’s possible that market participants will begin to consider the possibility of a “pivot” from the Fed and opt for a rate cut later in the year. In this scenario, gold is likely to gain bullish momentum. In this case, the US Dollar will likely weaken against its rivals. This is also likely to lead to increased demand for gold in China and India.
On the other hand, persistently high wage inflation and an unsatisfactory softening or strengthening of consumer inflation will cause the Fed to avoid assessing a potential pivot in policy by weighing on gold.
US economy performance
This will be another factor to look at when assessing the Fed’s policy outlook. The SEP in December revealed that the annual Gross Domestic Product (GDP) growth forecast for 2023 dropped to 0.5% from 1.2% in September. Chairman Powell and several Fed politicians have said their priority will be to contain inflation. It has also made it clear that they are ready to sacrifice growth to achieve this. During the 2007-2008 recession, the price of gold increased by 16%. It also increased by about 6% during the coronavirus-induced recession in 2020. If the US economy goes into recession, US T-bond yields will likely start to decline. This will cause investors to choose gold as a safe place to park their funds. On the other hand, if the economy avoids a recession, it is possible that the Fed will continue its tight policy longer than expected. This will limit the rise of gold.
Analysis of market positions
Open interest
Open interest on gold futures exchanges fell steadily from the beginning of March, when the amount of outstanding contracts rose above $2,000, to late October, when gold hit several-year lows near $1,600. However, since the beginning of November, open interest has increased moderately.
Decreased open interest in a falling market often means that market participants give up their long positions and liquidate their positions. However, when the downtrend in open interest ends, it is a sign that market participants believe they have bottomed out and are preparing to reinstate their long positions.
Gold ETF entries/exits
The chart below shows the change in gold ETF flows from the beginning of the year to the end of November in dollar terms. This chart does not indicate an uptrend yet. However, total outputs have been falling steadily since the beginning of October. When there are consistent weekly inflows, it can be seen as a sign that ETFs expect prices to continue to rise.
Supply-side dynamics
Presumably, demand-side dynamics have a greater impact on gold price than supply-side dynamics, especially in the short and medium term. However, looking at the costs associated with gold mining and global production growth gives us an idea of how supply will affect gold price action next year.
The chart below shows the change in “all-in-one maintenance costs (AISC)”, an industry-specific metric that is widely used as a measure of total expenditure in gold. The latest available data shows AISC hitting an all-time high of $1,289 in the second quarter, reflecting a year-on-year increase of about 20%. Barrick Gold Corp, the world’s second-largest gold miner, said the 9% decline in production in early November translated into a 22.7% increase in the company’s annual AISC in the third quarter.
According to CME Group, gold mining output has contracted by 7% since 2016. Historically, the price of gold has remained on an uptrend in the long run, with gold production growing below-2% below-average.
Production growth in the last few years has been below average, about 1.5% per year. With record high costs, it would be surprising to see a significant increase in this number. Therefore, supply-side dynamics, as it stands now, favor higher gold prices in 2023.
Summary assessment for gold price
Gold price has the potential to post strong gains in 2023. But there are significant downside risks. In the US, consumer and wage inflation softened in the first quarter. This allows markets to remain hopeful for a Fed policy change later in the year. This leaves the door open for further rise in the gold price. Combined with the strong recovery in the Chinese economy amid consistent reopening steps, it should help the yellow metal’s demand outlook improve and support the price. The market position in terms of open interest and ETF flows shows that investors are positioned to earn more below. Finally, supply-side gold is likely to support gold if mining output growth remains below average.
Conversely, gold is likely to fall if the US economy avoids a recession and the Fed doubles down on its tight policy outlook and inflation does not fall as desired. Additionally, the re-enactment of coronavirus restrictions in China may force market participants to reassess the demand outlook. It is also possible that this will make it harder for the gold price to gain traction.
Gold price technical view: Bullish
On the weekly chart, the Relative Strength Index indicator broke above 50 for the first time since May. Therefore, the technical outlook for the gold price turned bullish in early November. The RSI has been moving sideways just below 60 since then. This shows that buyers are in control of the gold’s movement. Also, gold broke above the 200-week SMA in the uptrend that started in November.
However, gold failed to retrace the 50 and 100-week SMAs, which formed stiff resistance around $1,800. Once gold stabilizes above these SMAs, it will need to turn the $1,820 support to maintain its bullish momentum. The yellow metal will eventually target $1,860 and $1,900 above this hurdle before $2,000.
On the downside, it forms support near $1,780. If buyers fail to defend this level, they are likely to witness additional losses towards $1,730 and $1,700. Also, a weekly close below $1,700 would be a key bearish divergence. It is possible that this could open the door for a long decline towards $1,640 and $1,600.
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