Precious metals are considered essential components of a current investment portfolio in a market context. The events of 2023 thus far have demonstrated that favorable circumstances exist for gold and silver to skyrocket. Both of their prices have increased significantly this year, with silver flirting with price levels last seen a decade ago and gold recently coming within pennies of an all-time high.
However, experts claim that the precious metals surge is just getting started. Analysts predict that both metals will soon break previous records.
“It is highly likely that gold will exhibit excellent performance in the upcoming months. According to a senior market analyst at the foreign exchange firm Oanda, the odds are in gold’s favor, and it may soon set new records.
Silver is also similarly ascending to new highs. At some point between 2024 and 2026, according to Jeff Christian, managing partner of the commodities consulting firm CPM Group, “we expect to see record prices on an average annual basis.”
Given the various market factors influencing investors’ preference for gold and silver, these bullish outlooks are not without foundation. Each of them is examined below:
1. Fears of a Recession
In the past, when the state of the world economy worsened, gold prices rose.
Although the outlook for the world economy has improved since the year’s beginning, recession worries are still daily among opposing viewpoints, according to the World Economic Forum’s most recent study. The WEF’s most recent study found that nearly 50% of respondents believed that a recession was likely, which is cause for concern.
“Headline rates have started to decline, but core inflation is sticking around longer than expected and is beginning to accelerate. More than three-quarters of respondents predict that the cost of living will continue at crisis levels in many nations throughout 2023, the analysts said, adding that many households are still under significant strain.
Inflation in the US is still out of control, which increases the likelihood of an economic recession as the Federal Reserve considers pausing its rate hikes. The political impasse over the US debt ceiling and default worries are other factors that many believe could hasten the economic downturn.
According to strategists at JPMorgan Chase, investors are likely to choose gold as those investments are anticipated to act as a cushion against the potential of a US recession this year.
“The long-term concept seems to have become a consensus in recent months,” JPMorgan analysts wrote in a Bloomberg note, adding that “the US banking crisis has strengthened the demand for gold as a proxy for lower real rates as well as a hedge against a “catastrophic scenario.”
According to the experts, such a trade is “relatively attractive” because it would have little potential loss in a scenario of a mild US recession and many potential upsides in a more severe one.
Banking Crisis 2.
The worst is yet to come for the banking sector.
This week, the government confiscated the assets of First Republic Bank and sold them to JPMorgan, deepening the crisis in the US banking industry. This was the third midsize lender failure in the past two months and the second-largest bank failure in US history.
Following this, bank stocks had a selloff on Wall Street, indicating that anxiety persists in the sector despite promises from banking authorities and bankers. Now that Silicon Valley Bank failed in the middle of March, the market is paying close attention to PacWest and Western Alliance, whose shares have been under pressure.
While many believed the sale of First Republic “would end the ‘who’s next?’ conversations,'” analysts at UBS observed in a note to clients that “investors are continuing to focus on remaining players deemed the weakest.”
The broader concern is that the bank collapses could cast mistrust on even solid banks, sparking a financial crisis that could affect the entire economy.
This is incredibly encouraging for the future of gold, which benefited from the market panic brought on by investors’ amplified anxieties. On Thursday, gold futures matched their all-time high of $2,072 per ounce, while spot gold was just pennies away from breaking their previous record.
3. Fed’s Upcoming Move
The US Federal Reserve’s final interest rate decision is another thing to watch. This week, in a highly anticipated move, the Fed announced its tenth interest rate rise in just over a year while simultaneously making a hesitant suggestion that the current tightening cycle is ending.
Actual interest rates, not inflation, determine gold’s performance over longer time horizons. Bullion would gain more strength if the Fed decided to stop raising interest rates because bullion typically has a negative relationship with actual rates.
More encouragingly, gold continued to trade close to $2,000 per ounce despite Fed Chair Jerome Powell’s ambivalence about stopping interest rate hikes, defying historical trends. Powell claims that the central bank must still evaluate the effects of recent bank failures, wait for the conclusion of US debt negotiations, and keep an eye on inflation.
Despite this, the market anticipates that May will represent the final rate hike of this tightening cycle and expects a rate decrease as early as September.
According to analysts quoted by Kitco News, the current state of profound economic uncertainty “will remain fairly positive for gold even if market volatility does pick up on fluid Fed rate hike expectations.” Some others observed that even with a hawkish Fed, the gold market should be able to maintain support between $2,000 and $1,980 per ounce, given the current level of uncertainty.
A New York-based analyst told Reuters that “gold’s ability to finish unchanged despite hawkish hints from (Fed Chair Jerome) Powell positions it well for a fresh push toward all-time highs now that the Fed is on hold and the debt ceiling situation looks increasingly dire.”
4. Strong Demand for Gold
A sign of the precious metal’s widespread appeal is the strong demand from central banks, which purchased a record 1,087 tonnes of gold last year.
The shopping binge carried on until 2023. The World Gold Council reported on Friday that central banks added 228 tonnes to the world’s reserves over the first three months, the most significant rate of purchases ever recorded in a first quarter.
WGC Senior Markets Analyst Louise Street underscored gold’s growing significance to central banks during difficult times in an interview with CNBC, saying that:
Top on the list for gold in official sector institutions’ holdings are always factors like its function as a diversification asset and its long-term store of value. Still, over the past two years, we’ve seen an increase in their weight on how well it performs in emergencies.
Regarding investments, Street also disclosed to CNBC that the Council noticed a considerable increase in demand in March, characterized by a substantial influx into gold-backed ETFs following the failure of Silicon Valley Bank and partially offsetting the outflows in the previous two months.
Due to recession fears and a flight to safety amid the banking instability, demand for bars and coins increased by 5% yearly, with US demand reaching its highest quarterly level since 2010. This aided in offsetting weakness in Europe, particularly Germany, where demand fell by 73% due to favorable accurate interest rates and a spike in the price of gold in the euro, which encouraged profit-taking.
The WGC claims that the ambiguous picture for Q1 illustrates how gold’s varied sources of demand support its function and performance as a global asset.
“As distinct economic factors and demand drivers played out in the global gold market, growth in some places countered contraction in others. In the Q1 2023 report, Street noted that one similarity was that many categories of investors gravitated to gold as a store of value in difficult times.
“Gold’s function as a haven asset has come to the fore in light of the turbulence in the banking sector, continued geopolitical tensions, and a challenging economic environment. Given this environment, investment demand is expected to increase this year, particularly now that the strong US dollar and interest rate hikes are less of an obstacle.
The looming possibility of a developed market recession may be the catalyst for inflows to rise later in the year, according to Street, who gave a preview of what’s to come. “Positive demand for gold ETFs has maintained in Q2 so far. The cornerstone of the market in 2023 will likely be central bank purchasing, which is expected to continue to be robust.
5. Stalling Supply
On the other hand, the supply is estimated by the WGC to have increased by 1% annually to 1,174 tonnes in Q1 2023, led by a slight 2% increase in mine production and a 5% increase in recycling.
It is still being determined, however, if the increase in supply would be enough to prevent a market deficit, given that the demand is expected to continue going up for the remainder of the year.
It’s crucial to remember that, according to WGC data, the demand for gold increased by 18% to 4,741 tonnes last year, virtually matching the unprecedented investment demand of 2011. Total supply, however, only grew 2% to 4,755 tonnes, primarily due to mine production reaching a four-year high.
For silver, the market has already entered a protracted supply shortfall from which a recovery may take years. According to the most recent data from the Silver Institute, yearly silver consumption increased by 18% to a record-high 1.24 billion ounces in 2022 despite a stable supply. As a result, there was a 237.7 million ounce deficit for the second year in a row, which the Institute calls “possibly the most significant deficit on record.”
The research company Metals Focus, which produced the data for the Silver Institute, said to Philip Newman that “we are moving into a different paradigm for the market, one of the ongoing deficits.”
The Institute predicts that 2023 will likely be similar to last year, with the market deficit remaining high at 142.1 million ounces due to solid demand.
The precious metals market will be in a solid position to continue its upward trend as long as fears about undersupply persist.