Will Gold Continue to Be Used
After hitting near an all-time high of above $2,000 an ounce in March 2022, gold prices have steadily declined. For most of 2022, gold prices have been under pressure from interest rate hikes and monetary tightening by central banks around the world, putting a lid on price gains.
Analysts have said that central banks in major economies, including the US Federal Reserve and the European Central Bank (ECB), are set to continue their rate hikes at least until the first quarter of 2023 to curb inflation.
Amid economic uncertainty, what is the long-term gold outlook?
Gold price analysis and overview 2022
Data compiled by the World Gold Council showed the gold price opened 2022 trading at $1,811.40 an ounce on 4 January. The precious metal continued to climb until it hit $1,936.30 on 24 February 2022, when Russia attacked Ukraine. It briefly dipped to $1,884.80 on 25 February, but the price quickly rebounded and resumed its advance.
Gold was trading above $2,050/ounce in the first week of March, close to the all-time high of $2,075/ounce seen in August 2020. However, the yellow metal lost its gains in the middle of March, falling below $2,000 as the Fed kicked off its monetary tightening to fight rising inflation.
On 16 March, the Fed hiked its benchmark interest rate by 25 basis points (bp), bringing the Federal Funds rate to the new target range of 0.25% to 0.50%. This was the Fed's first interest rate increase since 2018.
Gold was caught in a tug of war between runaway inflation and monetary policy during the second quarter, causing the bullion to fall to $1,817 by end of June, Sucden Financial's head of research Geordie Wilkes and research associate Daria Efanova wrote in a quarterly metals report on 2 August.
The yellow metal continued to weaken in the following quarter as it became evident that central banks were implementing aggressive rate hikes to tame stubbornly high inflation.
At its 20-21 September meeting, the Fed raised its policy rate by another 75 bps, taking its Federal Funds Rate to the 3%-3.25% range. It was the Fed's fifth rate hike since March 2022.
At the time of writing on 3 October, spot gold is trading at around $1,665 per ounce. Gold prices have dropped nearly 9% year-to-date and 5.8% in one year.
"Despite the strong drop during the quarter, so far in 2022 the metal held up better than other assets, including base metals, equities and bonds, as the yellow metal helped mitigate losses during this volatile period," Wilkes and Efanova wrote.
Gold price forecast 2022-2023: Short-term outlook
"In H2 2022, gold will face a challenging environment as it navigates through rising interest rates, persistently high inflation and a growing recessionary environment – more broadly, stagflation. In the near term, gold is likely to remain in line with the break-even inflation rate, which it has tracked in recent months, driven by the speed of tighter monetary policy and perseverance of inflationary pressures," wrote Wilkes and Efanova, without giving a price forecast.
In its gold price predictions on 23 September, ANZ Research forecast the yellow metal to trade at $1,800 in September and $1,820 in December, bringing the 2022 average to $1,842. The bullion is expected to fall to $1,756 in 2023 and $1,555 in 2024.
"The precious metal is vulnerable to moves lower amid a challenging macro backdrop. Expectations of another aggressive rate hike are likely to lead to continued strength in the USD. Haven demand remains subdued despite the rising geopolitical risks and worsening economic backdrop. Technically, the bearish trend is likely to continue," wrote ANZ Research's senior commodity strategist David Hynes and commodity strategist Soni Kumari in the note.
In its gold price forecast for 2022 on 12 September, Bank of America (BofA) Global Research revised its gold price prediction $1,938/ounce from $1,957/ounce in May.
On 1 September, Fitch Solutions revised its gold price estimate to $1,800/ounce in 2022, down from its previous forecast of $1,850/ounce due to various factors that pulled the precious metal to different direction. It expected gold prices to steady at $1,800 in 2023.
"Gold prices continue to be dictated by competing economic forces as a myriad of risks surround the global economy, but we believe the bearing of these issues is now toward the downside ," the firm said.
Ongoing recession fears, elevated geopolitical tensions stemming from Russia-Ukraine war and lingering risks from the pandemic itself are expected to support gold prices above its pre-Covid-19 level, Fitch Solutions said.
However, on the downside, rising vaccination rates were lessening risks of future Covid-19 outbreaks. Additionally, even though inflation was still above central banks' targets in key markets that the firm tracked, inflationary pressure appeared to be decreasing.
"Falling inflation expectations and rising nominal rates are also boosting US real bond yields and further buoying the dollar, exerting further downward pressure on gold," the firm added
Gold price predictions for next five years: Long-term gold outlook
Fitch Solutions expected gold prices to ease in the longer term beyond 2023 as the Russia-Ukraine conflict may ease by 2023, potentially reducing holdings of gold as risk-on sentiment returns. It forecast gold prices to fall to $1,700 in 2024, down from $1,800 in 2023.
In its gold price forecast for 2025, the firm predicted gold to trade lower at $1,610, dropping further to $1,600 in 2026.
"Additionally, as most of the global population will be vaccinated against Covid-19 and countries move more firmly to a new normal beyond 2022, risk-on sentiment should also increase in tandem, reducing the appeal of gold," Fitch Solutions said.
"This will be supported by the strength of the USD and continued recovery in global bond yields. Despite our outlook for gold prices to weaken, we do not see a return to pre-Covid-19 levels."
BofA expected an uptrend in its gold futures prices outlook, expecting the metal to rise to $2,100/oz from $1,938 in 2023. Bullion was projected to drop to $1,945 in 2024 before rebounding to $1,958 in 2025 and $1,969 in 2026.
The World Bank, in its Commodity Markets Outlook 2022 in April, forecast gold prices to average $1,650/ounce in 2024, declining from $1,700 in 2023 and $1,880 in 2022.
"Upside risks include rising inflationary pressures along with increasing geopolitical uncertainty and larger purchases of gold by central banks. To the downside, an easing of the conflict and more aggressive central bank rate hikes could weigh on prices," the World Bank said.
"In the longer term, gold prices could be affected by the Bank of Russia's policies, and should it engage in large gold sales, prices could drop materially."
Algorithm-based price forecasting service WalletInvestorwas bullish on gold, stating that the precious metal is "an acceptable long-term (one year) investment."
WalletInvestor believed gold could trade at $1,666.824 in December 2022, increasing to $2,058.057 in December 2025 and to $2,306.202 in September 2027.
Fitch Solutions, BofA, World Bank and WalletInvestor did not offer a gold price forecast for 2030.
It's important to remember that financial markets are still extremely volatile, making it hard to predict gold prices over a short period of time and even more difficult to provide longer-term forecasts. As a result, analysts and algorithm-based price prediction service can and do make errors in their gold price predictions.
FAQ
Is gold a good investment?
Whether gold is the right investment for you will be determined by your personal objectives and research. Always draw your own conclusions about the commodity's prospects and the possibility of meeting analysts' targets.
Keep in mind that past performance does not guarantee future results. In addition, never trade money that you cannot afford to lose.
How high can gold go?
Global economic growth, inflation rates, the US Treasury yield, interest rate policies and geopolitical risks all affect the gold price.
Should I invest in gold?
Your decision to invest in gold should be based on your risk tolerance, investment objectives, portfolio composition, and market experience. You should conduct your own research. Furthermore, never trade with money that you cannot afford to lose.
Related reading
Source: https://capital.com/gold-price-forecast-next-5-years
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