GOLD: FUNDAMENTAL ANALYSIS AND NEXT TARGET - LONG

7 בדצמ׳ 2022

For more than a month now, the price of gold has been trending upward, having risen by more than 10% since the beginning of November. Naturally, this raises the question of whether a new peak is coming, or whether the precious metal will continue to rise over the next year. The prospect of inflation in early 2023 may cause investors to look for a place to store their wealth. But there are things central banks can do that could disrupt trends.

In order to try to suggest whether gold prices will continue their current trend, it is important to get a sense of why they have behaved this way so far. While a number of factors can be pointed to, the biggest contributor is the decline in the dollar. In fact, since the beginning of November, the dollar has lost 8.5% against a basket of currencies. This suggests that if we want to know if the current trend in gold will continue, we have to see if the dollar continues to weaken at the end of the year.

The dollar is losing ground mainly because investors are beginning to believe that the Fed's emergency tightening is coming to an end. Last year the dollar was more attractive than other currencies because the Fed was the most aggressive of central banks in trying to rein in inflation. This meant that holding debt in dollars was more profitable than in other currencies.

But as the Fed begins to "retreat" from its aggressive stance, other central banks are expected to gradually catch up. The dollar's primary advantage is expected to wane in the coming months. Then there is the question of what happens in the first half of next year, when, according to most economists, the U.S. economy will fall into recession. And not one of those technically, debated definitions earlier this year. Will the Fed hold firm to higher interest rates during the recession to bring down inflation? Or will they succumb to political pressure and begin easing to support the economy?

The dollar's weakness is exacerbated by a resurgence in risk appetite thanks to China appearing to be moving away from its tight quarantine restrictions. This could help the global outlook as China may return to buying more raw materials and supply chains could be loosened in the coming months. A stronger global industrial base, along with a weaker yuan, could help lower inflation and ease some recession fears.

Markets are pricing in a 50bp Fed rate hike in December, a recent rate cut. This will allow the Fed to raise the rate by 25 bps at the end of January. Then there is the possibility of another hike in the first half of the year, which would leave the final rate at no more than 5.0%. Thus, if the Fed speaks next week and the markets rally late in the year, gold could continue its upward trend in the short term. But if the Fed continues the rhetoric of a rate hike, especially in light of the shiny jobs data, the dollar could gain some ground. And gold could shake out a bit.

7 בדצמ׳ 2022

הערה