Many people have invested in gold to protect their money against rising inflation. While this can be a helpful strategy in the short run, we must be clear that there is no long-term guarantee of protecting your wealth against rising inflation. However, here we’ll provide you with an outline and analysis of the factors that affect the price of gold and discuss the possible trends and gold price fluctuations in the near future.
We don’t need to emphasize the financial uncertainty we live in, as we face daily and are experiencing challenging financial strains. Completing the first trimester of 2023 and as we advance, we are seeing soaring prices and a severe inflation rise, with the average income staying at the same level. Thus, many Americans face adverse financial situations. Combined with the slow response from the US Federal Reserve to counteract the rise of inflation, we are slowly but certainly entering a recession.
Factors that Affect the Price of Gold
Before we can discuss the forecast for 2023 gold price, we must share the factors that directly affect the price of gold. Please note that the changes in each of these can seriously affect the price of gold, and if you plan on investing in gold in 2023, you must keep track of their changes.
- US Dollar Trend
The value of the US Dollar directly affects the price of gold, as when the US Dollar is strong, people are more inclined to invest in it or stocks. However, if the value of the US Dollar starts to decline, people will look for more stable investments, like gold or real estate. In this case, the demand for gold increases, driving its price up.
As the USD value declines, the price of gold rises!
- Interest Rates
A way to counteract inflation is for the US Federal Reserve to increase interest rates. In such cases, borrowing money (taking a loan) becomes more expensive, and people are inclined to stay away from loans and spend less. But people with savings are also affected, and many will revert to transforming their money into alternative assets like gold.
Rising bank interest rates tend to drive the demand for gold.
- Supply and Demand for Gold
Supply and demand are important factors that directly affect the price of gold. When gold is in demand, gold mining companies are inclined to increase the production capacity to satisfy the market demand. Still, the increased demand for gold can also drive the price of gold, as the production/supply of gold is limited.
A limited supply of gold drives its price up.
- War & Global Uncertainty
As we have seen this past year, global uncertainty and wars tend to directly or indirectly affect the financial markets. It also affects investment opportunities, and to protect their wealth, many people invest in gold or other stable investments that can withstand the war-state situation.
War affects and drives up the price of gold.
- Rise/Fall of Oil Prices
The price of oil is another factor that affects the price of gold, and this link is direct – when the price of oil rises, the price of gold rises with it. It is a simple relationship, as the top oil producers in the world, Russia and Saudi Arabia, control the oil supply. Because of the massive sanctions against Russia, oil prices have risen, severely affecting oil-buying countries, where we see significant inflation. A rise in inflation drives the demand for gold, which drives the price of gold.
An increase in oil prices drives the price of gold up.
- Demand for Gold for Jewelry and Electronics
Gold is highly prized for jewelry and indispensable in consumer electronics. Some countries like India, Pakistan, and China have a solid cultural relationship with gold jewelry, which can increase demand. Also, the demand for gold for electronics is rising, driving the price of gold up.
The rise in demand for gold for jewelry and electronics causes the price of gold to rise.
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The Current State of the Gold Market
Gold has been in demand for a long time, and per the World Gold Council report, in 2022, gold has been in the highest demand in the past decade. All the factors above have contributed, but the war in Ukraine was the most significant fact. We’ve seen the price of gold peak at about $2,000 per ounce, but other factors like the fluctuating value of the US Dollar and the hike of the interest rates have brought the price down by about 20%.
The global demand for gold has risen by about 18% since the beginning of 2023 and is still going strong. Many countries, like Turkey, the Middle East, and EU countries, have increased the purchase of large quantities of gold. This trend drove the price of gold upward, especially since the Covid pandemic wound down, many countries like China opened their economies, and weddings drove the demand for gold jewelry.
The price of gold crossed the $2,000 per ounce price in February 2023. A significant contributing factor was the collapse of Silicon Valley Bank and the rumors of other banks in crisis, like the problems with Credit Suisse, one of the leaders in private banking and asset management. To counteract these issues and restore investor confidence, the US Federal Reserve and the European Central Bank injected USD liquidity in the financial markets, propping up the value of the US Dollar.
However, many investors are still reluctant to trust banks. They are forced to seek safe-haven investments: gold remains at the forefront as a safe investment option, only surpassed by real estate.
Factors Affecting the 2023 Gold Price
From what we discussed above, you can note that gold prices result from a set of complex factors. It is not only the imminent banking crisis, but the following factors will affect and decide the price of gold in 2023:
- The US Federal Reserve Monetary Policy
The continued high inflation and the significant rate increases that the US Federal Reserve applied were directly correlated to the price of gold. The US Central Bank raised the interest rates six times to 4.5% at the end of 2022, and even though they announced the easing of the interest rates, we are seeing hints that the interest rates will rise to 5%. It can indicate that the price of gold may go upward in the following months of 2023.
The war in Ukraine and the possible upheavals in Taiwan can disrupt the price of gold. Any direct US involvement could mean heated conflicts and money invested in the military-industrial complex, which can affect the US economy and raise inflation, which could affect the price of gold in 2023.
- US Dollar Value Decline
The US Dollar’s value peaked in 2022, but it fell by 10% by March 2023. The current value of the US Dollar is held by enforced liquidity, which indicates that it can decline in value again soon. Other indicators show the banking systems are in trouble. Combined with the decline of the US Dollar, many investors are turning to invest in precious metals, primarily gold.
Gold Price and Banking Crisis in the US and EU
The 2008 financial crisis was one of the most significant market crashes, but the Silicon Valley Bank collapse has been the most significant bank failure in recent history. The Silicon Valley Bank had billions of dollars invested in long-term US Government bonds that lost value because of the hike in interest rates.
The bonds lost their value, but at the same time, the news reports on the unstable financial situation of the Silicon Valley Bank led the bank’s clients to withdraw their money from the bank. The bank couldn’t cover the client’s cash withdrawals and resorted to liquidating the bonds. It further deteriorated the bank’s poor financial position, resulting in losses counting in the billions. A similar situation happened to Signature Bank.
Similarly, Credit Suisse acknowledged material weakness, a control failure that led investors to lose confidence in the banking system. Thus, Credit Suisse clients have withdrawn billions in the first three months of 2023, and Switzerland was forced to jump in and enforce security measures. UBS, the Credit Suisse rival, overtook this bank, but the mistrust remained, and large investors are resorting to investing in precious metals and real estate.
Thus, the price of gold has remained at a steady high level, and there are indications that this trend could continue in the following months.
Forecast: Are Gold Prices to Rise or Fall in 2023?
The current price for gold stands at $1,983 per ounce (as of April 24), with indications that the price could fall slightly. Various reports have varying findings: the ANZ predicts that the price of gold in 2023 will continue to fluctuate around the $2,000 per ounce mark and could move slightly up by 2024.
Reuters analysts suggest that gold could fall to $1,850 by 2024, and TradingEconomics predicts the gold price will hit about $1,844 soon and fall to about $1.779 in the following 12 months.
Still, these predictions can vary, and fluctuations in the 2023 gold price are expected, depending on the current events at any given time. Still, most financial analysts point out that the strength of the US Dollar is a critical factor in determining and driving the gold price.
The expectation that the USD will remain strong in the first six months of 2023 can help the price of gold, but the anticipated decrease in the USD value can mean that gold prices could go higher by the end of 2023. Please note that these are predictions; only time and global events will show the rise or fall of 2023 gold prices.