Is gold an attractive investment in 2023?

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And if you’ve had your eye on the gold market this year, you might have marvelled at its shimmering performance. The precious metal rose within touching distance of new record highs back in May. Several elements fuelled this powerful rally, such as safe-haven demand after the collapse of some US regional banks and direct gold buying by central banks.

Gold trading and investment in 2023

The year has been prosperous for gold trading, with the precious metal almost touching record highs in May. Several factors propelled this significant growth: increased demand for safe-haven investments, primarily due to the collapse of certain US regional banks, and central banks purchasing gold directly.

However, it seems the buyers didn’t quite have enough strength to break the record, and attempts to reach this high mark were turned down for the third time in recent years. Ever since, bullion has been adjusting downwards, losing about 6% of its value as fears of a potential recession subside.

With the US economy staying resilient, investors started to recalibrate the Fed’s interest rate trajectory, pricing in higher rates for a longer period of time. That’s a problem for gold. Higher rates make bullion less attractive, because the yellow metal does not pay any interest to hold.

Therefore, gold has an inverse relationship with interest rates – it usually moves in the opposite direction of US bond yields. Similarly, gold also has a negative correlation with the US dollar. When the greenback strengthens, it increases the cost of bullion for foreign investors as gold prices are in US dollars, which consequently reduces its demand.

The seen and unseen effects of major economic events on gold

Next to interest rates and the dollar’s strength, another gold-driver made a grand entrance this year – central banks buying gold directly. The invasion of Ukraine and subsequent stiff economic sanctions on Russia, which resulted in the freezing of its FX reserves, sent ripples of this trend across the globe.

These geopolitical events helped to explain why China amped up its gold purchases. Beijing is essentially trying to diversify its reserves, away from major currencies and towards gold, serving as a failsafe if diplomatic relations with Western countries were to worsen. This trend looks set to continue, adding to long-term demand for gold.

The future path of gold – determined by a recession?

Right now, the one factor that could determine gold’s path, would be a looming recession. Such an event will affect yields, the dollar, and safe-haven demand simultaneously. Although, at this point, it doesn’t seem like a recession is forthcoming, at least not in the United States.

For gold to make a more significant upward move towards record highs, it would likely need to be fueled by fears of a recession to drive safe-haven demand, as well as speculation about Federal Reserve rate cuts. If US economic data does start to show more negative trends later this year, especially if the labour market weakens, those factors could come into play. Time will, however, tell.

All this suggests the US economy remains resilient, so the Fed may need to maintain higher interest rates for an extended period of time. This could be a challenging period for gold, as it implies a period of high bond yields, which typically depress the price of gold which does not yield returns.

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As we’ve seen, the world of gold trading is an ever-fluctuating market, teetering on the brink of exciting possibilities. It’s just a snapshot of the dynamic and ever-evolving financial landscape that awaits you in the world of trading. Regardless of these uncertainties, XM.com in Research & Education allows you to explore and strengthen your trading knowledge, providing market overviews, news, and analysis. XM’s well-researched insights update you on the latest developments and guide you through the ups and downs of the market. Open Account Now!!

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