The global markets are facing chaos and uncertainty, and that’s leading to an inevitable crash in the prices of commodities like Gold. However, the metal could soon be back on track and soaring towards $4000 per ounce.
Gold prices have failed to spur physical demand in Asia
Gold prices have been falling for the past two weeks, but that hasn’t spurred physical demand in Asia. The tumbling price has pushed investors to the sidelines, while some consumers have taken advantage of the cheaper prices to buy gold. But in some cases, these purchases are still more expensive than the alternatives.
While the prices are declining, the premiums are soaring. This is particularly true in Thailand, where the local currency is weak and gold trades at a premium. It has been in the double digits for the past few months.
Silver is also on the rise. According to Silver Bullion Pte Ltd., founder in Singapore, sales of silver rose 235% in the first week after Russia invaded Ukraine. However, the real winner has been silver’s premium. In recent weeks, the price differential has soared to $1.
One of the reasons for this premium is the fact that many Asian countries have not been able to get bullion into the market. For this reason, some of the bigger purchases have been in the East.
Gold prices could surge to $4,000 per ounce in 2023
Gold prices could reach $4,000 an ounce by 2023, according to Juerg Kiener, managing director of Swiss Asia Capital. This price would be more than five times the current value.
In recent years, central banks have been increasing gold reserves. They also are diversifying their foreign exchange holdings to lessen their dependence on the U.S. dollar. However, the continued aggressive rate hikes from major central banks have led to sizable outflows in the second half of the year.
Despite a 3% increase in the price of gold, demand in December was muted. The biggest buyer in the third quarter was Turkey.
Earlier this month, the People’s Bank of China announced the first official gold purchases in over a year. Analysts believe this is a sign of increased demand from the Chinese market.
Another big seller this month was the Central Bank of Uzbekistan. As inflation in the U.S. hit 8.3 per cent, the Fed raised rates by 50 basis points. It is still possible for more rate hikes to come. If the Fed continues to raise interest rates, markets could become more volatile.
China’s central bank added $1.8 billion in gold reserves
In November, China’s central bank added 32 tons of gold to its official reserves. This was the first official increase in over three years. The total reserve now sits at about 1,980 tonnes.
The People’s Bank of China added $1.8 billion to its gold reserves in the past few months. Its latest addition brings the total to around $112 billion.
While China’s gold purchase is the largest in years, it is not the only country increasing its holdings. Central banks have been buying up gold at the fastest rate in decades.
The World Gold Council estimated that central banks bought 399 tonnes of the yellow metal in the third quarter of 2022. However, there has been little data on the actual number of tonnes, since some central banks are not reporting their holdings.
Similarly, it is not clear how much gold Russia has. While the central bank has said it would like to have 25 percent of its reserves in gold, monthly reporting has been discontinued.
Gold prices have failed to launch a comeback in the near term
Gold prices have retraced nearly five years of gains in the last three months. Although gold has failed to launch a comeback, it is still the best asset to hold this year. However, it has fallen by around 20% from its March peak.
In the past six weeks, global growth worries have increased. Mixed economic data has also emerged from several major economies. And a war in Ukraine has helped fuel energy prices.
Gold has been seen as a safe haven in turbulent times. However, in the 1980s, it failed to protect investors from inflation. Now, the dollar is strong, and foreign investors are being charged more to invest in gold.
It may be possible for gold to resume its upward trajectory, but the picture on inflation will need to change. Otherwise, gold’s price will likely drop again.
The Fed has been aggressively hiking rates to bring down inflation. But the growth outlook for the US economy is uncertain. The Fed’s tightening cycle may have run its course.