Frank Holmes ‘ S
Ole Hansen, a commodities analyst at Denmark’s Saxo Bank, argues this scenario is likely once markets realise inflation will remain high despite monetary tightening. I personally think gold could climb up to $ 4,000.
Hansen points to three factors that could push the precious metal to historic highs next year. First, what we call the “war economy” and the mentality it fosters can discourage central banks from holding foreign exchange reserves –in the name of self– sufficiency-which would favor gold. Second, governments will continue to increase spending-and deficits-to implement ambitious projects, such as the energy transition. And third, a potential global recession in 2023 would prompt central banks to pump cash into the market.
The same analyst says his comments are not so much a prediction as a mental experiment, but I don’t think investors should take his assessments lightly. Just for the reasons Hansen mentioned, I agree that it is very likely that we will see the value of gold skyrocket to $ 3,000– or higher – within the next 12 to 18 months.
Central banks buy gold
Hansen is right when he draws attention to the fact that central banks increasingly prefer gold as a reserve asset. In the third quarter of 2022, official net gold purchases reached 400 tons, which is about 20 billion euros. dollars – the largest amount in half a century. Turkey was the largest buyer of gold in that quarter, followed by Uzbekistan and India.
Last week, China’s central bank said it had bought gold for the first time since 2019. Specifically it added 32 tonnes, or 1.8 billion euros. dollars, raising its stock to 1,980 tons.
Although its gold stock puts it at Number 6 on the world list, not counting the IMF, China still has a long way to go if it wants to diversify substantially from the U.S. dollar.
The precious metal accounts for just 3.2 percent of its total reserves, according to data from the World Gold Council (WGC). Compare that figure to 65.9 percent of reserves in the U.S., the world’s largest gold holder with more than 8,133 tons.
I predict that China will buy significant amounts of gold in the coming months.
The risk of too much tightening with an eye on recession
With inflation likely to continue to run high in 2023, a small to mild recession looks increasingly likely. There is a risk that the U.S. Central Federal Reserve will tighten its monetary policy too much, and this will have a significant macroeconomic impact on gold.
One indicator that analysts are watching is the spread of the yield on the 10-year bond over the 2-year. For at least 40 years before every recession the yield curve has been reversing. Today, the yield curve is at its most inverted level in 4 decades, suggesting a recession is almost certain.
In recent days, most banks and rating agencies have downgraded their estimates of global growth in 2023, due to estimates that want the Consumer Price Index to remain high and monetary policy to tighten further. Buying gold could prove to be a wise investment choice. In five of the past seven recessions, gold delivered positive returns, according to the World Gold Council, providing some protection to investors.
Gold is preparing for a rally;
Technically, gold is starting to look attractive, as the metal has broken through its 50-and 200-day moving averages. After breaking the base level of $ 1,800 / ounce two weeks ago, Gold is again testing its psychological milestone.
If completed today in 2022, the price of gold would fall for the second consecutive year. However, despite a decline of 1.75% year-on-year, the yellow metal was among the best assets to hold this year.
Conditions were not constantly favorable. Holdings in all known gold-backed ETFs have declined for seven consecutive months beginning November 2022. However, as gold starts to move upward, those declines are smoothing out.
A rally in the precious metal –possibly to $ 3,000, as Ole Hansen predicts– would be hugely beneficial for shares of gold mining companies. The securities of these companies are much more volatile than the price of the metal itself. As shown in the graph below, when gold climbs, gold mining stocks make historic “jumps”. (The reverse has also happened.)