The U.S. Federal Reserve has moved to increase the benchmark interest rate for several consecutive months in an effort to forestall escalating inflation. While the Fed’s efforts have been noble, the effect of these consistent interest rate hikes on gold prices has been immense.
As benchmark interest rates rose and the dollar surged in value, gold saw its prices drop amid the increased opportunity cost of holding gold bullion and investor interest in asset classes that could allow them to take advantage of the higher interest rates. The result is that gold saw its prices slump for a significant portion of 2022 before those prices started to pick up toward the end of the year.
Projections from the end of the year and early 2023 show that gold prices would rise through the year, partly due to a less hawkish stance from the Fed as well as increased demand from central banks and “ongoing political tensions.”
Bloomberg Intelligence predicts that gold prices could soar past the $1,700–$2,000 per ounce range as the Federal Reserve pivots on its aggressive stance at some point in 2023. The firm’s senior macro strategist Mike McGlone noted that the “inevitable Fed pivot” would launch gold prices past the $1,700-$2,000 range.
McGlone stated that this would continue the trend of central banks stopping rate hikes due to slower projections for global economic growth and a reduction in copper prices.
McGlone analyzed the copper-gold ratio in relation to U.S. treasury yields to get a better idea of how gold could perform this year. According to McGlone, copper’s 10% rally this month “may be fleeting” as the metal faces diminishing growth on a global scale, central-bank restraint and reverberating effects from the interest rate hikes issued last year by several central banks around the world.
He explained that as it stood, gold was poised to outperform copper, especially if the Fed decides to pause interest rates or cut them altogether in 2023. While copper performed admirably and saw soaring prices in 2022, gold prices were affected by a strong greenback and a cycle of aggressive monetary policy tightening. On the other hand, gold prices have been trending upward since last year; by Jan. 18, 2023, February Comex gold futures were trading at $1,906.
McGlone added that it was quite normal for base metals such as copper to outperform broad commodities during cycles of monetary policy tightening. He then noted that we hadn’t seen the full consequences of the tightening cycle in 2022 and that economic factors in China could limit the upside potential in industrial metals and interest rates.
The expected boom in gold prices could help extractors such as Freeport-McMoRan Inc. (NYSE: FCX) to further consolidate their positions at the top of the industry.
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