Gold to have a difficult start in 2023 but shining by year end

After a difficult year filled with challenging headwinds, the gold market is ending 2022 on an upswing in roughly neutral territory at around $1,800 an ounce. The yellow metal is looking to end the year down less than 2%, which would make it one of the best-performing assets, just behind the U.S. dollar. While bullish sentiment is building in the marketplace, some analysts are warning investors that they will need to be patient in 2023.
Although the gold market is expected to continue to outperform most asset classes in the new year, some major banks and commodity analysts are not expecting to see a significant push higher until the second half of the year. For now, gold prices are expected to remain in neutral territory at around $1,800 an ounce.
Conditions that weighed on gold through most of the year, mainly the Federal Reserve’s aggressive monetary policy stance, could remain in place through at least the first half of 2023.
In its last monetary policy meeting for 2022, the Federal Reserve forecasted the Fed Funds rate peaking above 5% in 2023. The central bank’s updated forecast capped a year that saw the most aggressive tightening cycle since 1981 as inflation rose to a more than 40-year high.
Although inflation has come down from its summer highs, Federal Reserve Chair Jerome Powell said that the central bank’s job isn’t finished.
“We’re not at a restrictive enough stance even with today’s move … We’ll get to that point, and then the question will be, how long do we stay there? And there is the strong view on the committee that we’ll need to stay there until we’re really confident that inflation is coming down in a sustained way, and we think that that will be some time,” he said in a press conference Dec. 14.
While the Federal Reserve continues to take a firm stance on inflation, economists note that the central bank is closer to the end of its tightening cycle, which could be good for gold.
Bank of America looks for the Federal Reserve to end its tightening cycle in March and sees the first rate cut by the end of 2023.
In this environment, Michael Widmer, commodity strategist for Bank of America, said that gold prices have a path to $2,000 an ounce.
Commodity analysts at Commerzbank are also expecting the Federal Reserve to cut interest rates by the end of the year. However, they added that in the short-term, gold prices could struggle as investors adjust to a new terminal rate hike above 5%.
“After what is expected to be the last interest rate hike in March, a period of unchanged rates is likely to follow before the Fed cuts the key rate again toward the end of 2023 in view of a weak economy and lower inflation. The Fed, on the other hand, is not yet forecasting this. As soon as the Fed also adopts this view, the gold price should rise again,” said analysts at the German bank.
“This should be the case in the second half of next year, because by then, inflation will have fallen far enough and the U.S. economy will have been in recession since the beginning of the year. The gold price should also be supported by the weakening of the U.S. dollar expected by our currency strategists.”
Commerzbank sees gold prices pushing to $1,850 by the end of 2023.