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Central bank activity seen as key to gold market dynamics in 2023

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The market’s prediction of where the Federal Reserve’s interest rate policy might go next has played a pivotal part in the increase of gold prices.

Despite the market interpreting statements from officials as indicating that interest rates had peaked, the US Federal Open Market Committee has voted to increase interest rates at each meeting of 2023 so far. However, investors generally try to position their portfolios so they can take advantage of a situation before it materialises. Perceptions of what is likely to happen next is often as important as the situation itself.

“After a period of rate hikes that have resulted in the highest interest rates since the onset of the global financial crisis of 2007-2008, many investors are now wondering when and how the situation will change,” said Stuart O’Reilly, Market Insight Analyst at The Royal Mint. “Theoretically, rising interest rates reduce the attractiveness of gold as returns on investments in bonds and securities rises. If central banks decide to end their run of interest rate hikes, or even potentially cut interest rates to avoid a recession, gold could benefit.”

So far this year, we have seen that the belief by many that interest rates are likely to either remain where they are, or even be cut later in 2023, has been supportive of gold, even in a theoretically bearish monetary policy environment.

The yellow metal’s safe-haven appeal was heightened in the wake of the banking crisis and the IMF’s recessionary sentiment as investors looked to an asset that is expected to retain or increase in value during times of market turbulence. First Silvergate Bank, then Silicon Valley Bank, followed by First Republic Bank, Signature and Credit Suisse – as the banking crisis unfolded, many investors feared the contagion might spread further.

Gold prices hit all time high in sterling terms

Gold prices in GBP reached an all-time high and prices in USD and EUR came within touching distance of the record. The amalgamation of these events reduced overall investor confidence in the banking system which in turn increased the demand for gold, traditionally seen as a safe-haven asset. Following the collapse of Silicon Valley Bank, gold prices reached highs of $2,000 on the w/c 13th March, whilst The Royal Mint saw a 230% week-on-week increase in sales of gold investments.

Gold’s performance throughout the pandemic, the outbreak of the war in Ukraine, and a period of high inflation, has highlighted the potential role of precious metals in an investment portfolio. Central banks have continued buying gold at pace, with Q1 purchases at the highest level since 2013. This follows a record year for central bank gold purchasing in 2022, when more gold was bought than in any year since 1950. Central banks now hold more gold than at any time since the mid-1970s.


And it’s not just central banks who recognise the role gold could play in a portfolio. The Royal Mint, which offers a range of bullion coins and bars, as well as digital investment products, conducted research earlier this month which showed 30% of investors are planning to invest in precious metals this year with existing investors planning to up their monthly investments by 16%.

At the end of its financial year in March, The Royal Mint said the Precious Metals division enjoyed a record year with the number of customers buying and selling precious metals up by 11% on 2021/22.

After a period of rate hikes that have resulted in the highest interest rates since the onset of the global financial crisis of 2007-2008, many investors are now wondering when and how the situation will change. Theoretically, rising interest rates reduce the attractiveness of gold as returns on investments in bonds and securities rise. If central banks decide to end their run of interest rate hikes, or even potentially cut interest rates to avoid a recession, gold could benefit.

“Our own research has shown that the challenging macro picture is spurring a more risk-conscious investor profile this year,” said O’Reilly at The Royal Mint. “With few positive indicators around the global economy and continuing volatility across financial markets right now, we are seeing signs that gold is likely to remain in favour among investors in the coming months.”

Analysts watching for more gold demand in Asia

Authorities seem to have successfully averted a banking crisis following turmoil at several US banks and the Swiss banking giant Credit Suisse earlier this year. However, this uncertainty has pushed gold prices even higher than in the first few weeks of the Russian invasion of Ukraine, or the worst of the pandemic. Any further development along similar lines in the banking sector, or any escalation of geopolitical tensions in Eastern Europe or the South China Sea, may increase demand for gold and potentially increase the yellow metal’s price.

Gold jewellery accounts for roughly half of all gold demand and analysts often monitor the two largest consumers of gold: India and China. In India, as we enter the monsoon season, analysts typically look to the weather reports. A good monsoon means a better harvest thus more money in the rural economy. This often translates to higher demand for gold jewellery.

2023 got off to a positive start in China, with Q1 gold jewellery demand the highest since 2015, fuelled by the growth in household incomes and the ending of the stifling strict zero-COVID measures on the retail sector. Data published by the World Gold Council shows global gold jewellery demand is still below the 10-year average, especially in price-sensitive Asian markets. However, some analysts are beginning to speculate that these markets are acclimatising to the higher price level, which could bode well for demand.

Since March, gold prices have remained fairly resilient and stuck around the USD$2000/oz mark as investors continue to keep their money in the asset class. Our own research has shown that the challenging macro picture is spurring a more risk-conscious investor profile this year. With few positive indicators around the global economy and continuing volatility across financial markets right now, we are seeing signs that gold is likely to remain in favour among investors in the coming months.

However, as always, there are several factors at play and it is unclear how gold markets will react to key events in the coming months. Central bank decision-making, in particular, is a key battleground for gold price movements and needs to be watched closely by those looking to understand how gold’s value might move in the months ahead. This reminds careful investors that what lies ahead may look unlike what is in our rear-view mirror.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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