Gold: 3 scenarios by which the metal will mark new highs in the short term

So far in 2023 net speculative positioning in gold futures “increased considerably”, especially after the collapse of the Silicon Valley Bank (SVB). “Before the banking problems, the positioning in gold futures (a sign of investor interest in gold) seemed quite weak”, although now the situation is very different, explained this expert in Bolsamanía.

His safe haven asset status returned interest in the precious metal to be able to deal with the banking crisis unleashed in the US, which has not yet ended. Retail investors have bet heavily on the precious metal, but the role that central banks have given to gold as a currency diversifier has also been important.

The “rush” of gold, now by the central banks

“The central banks of developing countries have been the main buyers of gold in the last decade. In general, they want to diversify and get away from the American dollar. The motivation is to avoid ‘importing’ US monetary policy. Switching to any other fiat currency (such as the euro or yen) carries the same problems as holding the US dollar, but with potentially less liquidity. Gold, as a pseudo-currency that has played a formal and informal role as a monetary instrument for several millennia, has come back into vogue among many central banks,” Shah noted.

Say what “the move to gold (the pseudo-currency that is not controlled by any central bank) has been considered the most appropriate alternative”especially for Russia in the face of the sanctions caused by its invasion of Ukraine (in 2022 it bought 28 tons of gold), and central banks have continued to buy the precious metal this year to get around the banking crisis. In fact, “global gold reserves increased by 114 tonnes in the first quarter of the year,” marking “the strongest start to the year in terms of central bank gold purchases since 2010.”

Notably China has been declaring gold purchases for five consecutive months, and also that the Monetary Authority of Singapore added nearly 69 tonnes of gold to its reserves in the first quarter of 2023, marking its first purchases since 2021 and increasing its gold holdings by 45% compared to its holdings at the end of 2022. “On net, Singapore has been the largest buyer of gold so far this year,” says this expert, who believes that as a small, foreign-focused nation, it could be more exposed than other nations to global upheavals and, therefore, act with those precautions.

Gold: what factors can drive its price

With the banking crisis still unresolved, It is expected that investor interest in gold will continue to growas well as that of the central banks that use the precious metal as a currency diversifier, especially in accordance with the US debt ceiling issues. That could be it, says WisdomTree, “the next catalyst” of interest for gold.

The debt ceiling is the US government’s self-imposed limit on the amount of money you can borrow to pay for services like Social Security, Medicare, and the military. Congress is in charge of setting the debt limit, which currently stands at $31.4 trillion and that it was reached a few months ago, so it is urgent to raise it or, otherwise, the United States could default.

It has already risen 78 times since 1960, under both Democratic and Republican presidents, and it is something that could happen again. Negotiations are ongoing and the agreement is expected to be reached ‘in extremis’, after the US Treasury has been taking “extraordinary measures” for months to ensure that the Government pays its bills. Treasury Secretary Janet Yellen has already warned that the money will run out on June 1 and that there are no more “budget tricks” to be adopted moving forward, so she urges the deal more than ever.

“Consequently, we expect the demand for gold as a hedge to continue to increase”, pointed out the expert of the New York firm. Specifically, he sees several possible scenarios for metal this year.

The possible scenarios for gold

1. Consensus

As this analyst says, “the risk is clearly high this year if a recession or financial crisis materializes.” And it is that gold “is a highly coveted asset in times of economic and financial stress, so a recession could further boost sentiment for the metal.”

In this scenario, gold reaches USD 2,285/ounce in the first quarter of 2024, surpassing all-time nominal highs (US$2,061/ounce on August 7, 2020) in Q4 2023, at US$2,260/oz. However, WisdomTree points out, in real terms, it does not reach the historical maximum, which was reached in January 1980. In fact, it would be 33% below that level. And, in real terms, it is still 10% below the 2020 high.

2. Bullish case

“In this situation, the Federal Reserve (Fed) pays attention to the alarm signals of the financial markets and accelerates the turn of its monetary policy. If the US central bank begins the monetary expansion before the summer of 2023, the yields of the fixed income will fall, and assuming it moves before the European Central Bank and other major central banks, we could see the US dollar depreciate at a faster rate,” Shah says.

The New York firm believes that inflation “will continue to be elevated” since the softening of the Federal Reserve’s stance “will fail to generate the deflation of goods prices necessary to reduce headline inflation in the consensus situation.” Thus, assuming that the financial fears to which the Fed responds are real, “we expect gold futures positioning remains elevated“.

In this case, Gold could reach US$2,517/ounce. This would be 22% more than the historical nominal maximum (reached in August 2020) and 1% more than that level in nominal terms. However, it would be 28% below the actual historical maximum reached in 1980.

3. Bearish case

In the bearish scenario, inflation falls to 1.8%, that is, below the Federal Reserve’s target. “Essentially, the Fed is making a policy mistake by overdoing the tightening. Bond yields rise and the US dollar appreciates as an overzealous Fed outperforms other central banks,” Shah says. Although in WisdomTree they recognize that such a situation “increases the risk of recession, and therefore could be positive for gold by attracting more investors to the yellow metal as a hedge.”

In this situation, Gold could reach US$1,725/ouncebringing prices back to the levels of November 2022.