News from the Financial Associated Press on December 26 (edited by Niu Zhanlin)Looking back on 2022, the international gold price has experienced a crazy year. Although it was basically flat compared with the beginning of the year, its fluctuation range exceeded 20%.
After the Russian-Ukrainian conflict broke out, the price of gold once approached its highest level in history. However, against the backdrop of the Federal Reserve’s tightening of monetary policy, gold came under pressure and fluctuated downward as the dollar strengthened and U.S. Treasury yields rose.
As of press time on Monday (December 26), the spot gold price has fallen by 1.17% year-on-year; the spot silver price has risen by 1.84%.
Trend review
In the first quarter, after the conflict between Russia and Ukraine broke out, gold prices soared to $2,069 an ounce in March, the highest level in 19 months, driven by risk aversion. But this rapid surge was short-lived, and the price of gold quickly returned to the $1939 level by the end of the first quarter.
In the second quarter, the market theme began to change. The Federal Reserve’s hawkish monetary policy pushed the US dollar index and US bond yields up, and gold prices fell further, falling to around US$1,810.
By the third quarter, seasonal weakness combined with a surging dollar forced gold to a 30-month low of $1,691. Since the start of the Fed rate hike cycle, the negative correlation between gold and the U.S. dollar has become even tighter.
The third quarter is also traditionally a strong month for gold production, and mining and processing operations in Russia, China, Canada and the United States will not be affected by the cold weather. During the three-month period, gold mined gold rose to nearly 950 tonnes, up 2% year-on-year.
In the fourth quarter, gold ushered in another rebound, rising nearly 9%. U.S. inflation has begun to cool, and investors expect the Fed’s monetary policy to usher in a turnaround. In November, the position of fund managers in gold futures turned from net short to net long, and the market became optimistic about the prospect of gold.
Philip Newman, managing director of Metals Focus, pointed out that gold’s performance in 2022 is the result of two factors. “Obviously the first one was the war, we saw a range of precious metals prices spike and gold’s safe-haven function worked, as everyone expected … but then it dissipated.”
Newman said that it is worth noting that the shock of the war was only short-lived, and then the long-term drivers began to emerge, that is, the Fed’s interest rate hike actions and expectations.
Fed hikes rates to fight inflation
The Fed recently raised interest rates by 50 basis points and signaled plans to raise interest rates through next spring to combat high inflation. The decision marks a retreat from the Fed’s four straight 75-basis-point rate hikes, which have seen the benchmark federal funds rate rise to a 15-year high of 4.25% to 4.5%.
The December rate hike capped a year of tightening by the Fed, which has slashed its policy rate from nearly 40% this year at the fastest pace since the early 1980s in an effort to rein in inflation that has hovered near four-decade highs. The zero level has been raised sharply all the way. This year, the Federal Reserve has raised interest rates 7 times, with a total of 425 basis points.
Traditionally, gold is a very good inflation hedge and an asset worth investing in during periods of negative real interest rates.
“Gold is actually doing much better than many of the traditional inflation hedges that investors hold,” said Juan Carlos Artigas, global head of research at the World Gold Council (WGC).
While gold has suffered from rising opportunity costs, Artigas said it has largely maintained its value amid rampant inflation. “Gold has outperformed TIPS, and more generally, global inflation-linked bonds, as the higher opportunity cost is not only affecting the gold market.”
Artigas added, “Over the past year, investors have had to manage risk, whether from high inflation or geopolitics; these factors have combined to support gold demand.”
Joe Cavatoni, chief market strategist for the Americas at the World Gold Council, pointed out that no one can hedge inflation within three weeks, and no one can hedge inflation within three months, but gold can hedge inflation for a long time, and it is a suitable strategic hedging portfolio. asset.
Geopolitical Risks and the Decline of Dollar Hegemony
The Russia-Ukraine conflict that occurred this year shows that geopolitics has further undermined the existing global trade and capital integration model, and has once again become a major source of economic and financial risks. This was also the main factor driving gold’s surge in the first quarter.
Although the macro economy is currently the main factor driving gold’s performance, the outbreak of geopolitical conflicts will also support gold, as investors look to invest in gold to protect themselves from turmoil, and gold’s resilience in 2022 is largely due to Because of the geopolitical risk premium.
Since the Russia-Ukraine conflict, Western countries have frozen Russia’s US$300 billion foreign exchange reserves, which has greatly impacted the credit of the US dollar as an international currency. Countries are also deeply disturbed by this and are eager to reserve a certain amount of gold to hedge against this risk.
Societe Generale pointed out that in the context of most central banks expressing their desire to achieve the “de-dollarization” of asset allocation, some reserve assets of the Russian central bank are currently frozen, highlighting the risks inherent in holding some US dollar assets, including US Treasuries .
Russian President’s Press Secretary Peskov said, “As you know, a very large number of assets have actually been looted by Western bloc countries, including our gold foreign exchange reserves. This is completely illegal and violates international law. It is nothing more than a violation of property. , which includes both state property and private property.”
In its “Financial Stability Review,” the Russian central bank called on central banks to reassess the risks of dollar and euro reserves, predicting a rapid rise in global gold demand.
At the same time, the US government is still provoking disputes in many regions such as the Middle East, Eastern Europe, and East Asia. 2023 will not be a peaceful year.
According to a report by the American “National Interest” magazine, the Ukraine crisis has clearly shown to many countries that a multi-polar system is more effective in the world than a US-centric model, and this trend also puts the hegemony of the US dollar at risk.
Part of the appeal of using the dollar internationally is the geopolitical power, economic power and dynamism of the United States. But that allure has lost some of its luster. From a foreign perspective, the U.S. national debt has surpassed the staggering $31 trillion mark, and America’s global influence is declining. In addition to countries like Russia and Iran being forced to de-dollarize, it is no coincidence that some of the allies of the US (India, Israel, Japan, etc.) are also considering the possibility of using or holding various currencies in their trade and foreign exchange reserves .
According to the latest data from the International Monetary Fund (IMF), the share of US dollars in global foreign exchange reserves in the second quarter of this year was 59%, the lowest level since 1995. In 2001, the share of US dollars was as high as 72.7%.
At the summit of the China-Gulf Arab States Cooperation Council in December, building a new pattern of three-dimensional energy cooperation has become a key area of cooperation between the two sides in the next 3 to 5 years. The RMB settlement of oil and gas trade has become a hot topic. At the same time, as China and relevant countries jointly promote the construction of the “Belt and Road”, the RMB has become a new choice for the diversification of foreign exchange reserves in Arab countries, which is a serious blow to the hegemony of the US dollar.
Global central banks
According to data released by China’s State Administration of Foreign Exchange on December 7, China’s gold reserves reached 1,980 tons by the end of November, accounting for 3.4% of the total foreign exchange reserves. This is the first time since September 2019 that China has disclosed that it has increased its gold reserves, and the new signal has surprised but not surprised international investors.
Not only is China increasing its gold reserves, but central banks are also increasing rapidly. According to the report of the World Gold Council, the central banks of various countries added nearly 400 tons of gold in the third quarter of this year, more than four times that of the same period last year. Compared with 87.7 tons in the first quarter and 186 tons in the second quarter, the net purchase of gold has gradually increased. The cumulative net purchase of the first three quarters has exceeded the largest net purchase in a single year since statistics began in 1967.
The increased interest in gold by central banks comes as they look to diversify their foreign exchange reserves in gold, including as a hedge against political risk. In the past ten years, it is the central banks of Turkey, Uzbekistan, Qatar, India, China and Kazakhstan that have shown the main demand for monetary gold, creating new investment records time after time.
Zhang Wen, a gold analyst at CITIC Futures, said, “The central bank purchased a large amount of gold in the third quarter. There are four main reasons. One is to avoid the risk of loss from the decline in US bond prices; U.S. recession expectations continue to strengthen.”
Some analysts also gave another explanation: gold does have a key advantage. Unlike bonds, it has no risk of counterparty default.
Outlook
The current market consensus is that the global economic growth will slow down next year, and there may be a short-term and partial recession. Although inflation is low, it is still high, and the pace of interest rate hikes in most developed countries will come to an end. In this environment, gold performance is expected to show a stable and positive trend.
In forecasts for 2023, Saxo Bank Chief Investment Officer Steen Jakobsen said that any belief in a return to pre-pandemic deflation next year is out of the question, as the world has entered a global war economy with major countries fighting Strengthen national security in all aspects.
According to Saxo Bank’s forecast, as inflation remains stubborn, industrial countries will implement extensive price controls, which may cause the price of gold to soar to $3,000 an ounce.
As the World Gold Council’s Newman explained, the better-than-expected inflation data led to optimism that the Fed could slow its pace of rate hikes and even switch to accommodative policy sooner than expected. “We’ve seen a short-covering rally that’s been seen in both gold and silver.”
Eric Strand, portfolio manager and founder of AuAG ESG, said in his 2023 outlook that gold has rebounded sharply from its lows and this could just be the beginning of a new bull market for gold. “We expect gold prices to reach record highs in 2023, when prices exceed $2,100 an ounce, it will start a new long-term bull market.”
As the Federal Reserve’s aggressive monetary policy stance draws to a close, investors’ appetite for gold has shifted, Strand said. We believe central bank policy shifts will spark explosive moves in gold over the next few years.