Alright, to be fair, gold did prove its mettle last year as the SPDR Gold Shares (NYSEARCA:GLD) outperformed the S&P 500 and the Bloomberg US Aggregate Bond Index by wide margins, but the largest bullion-backed exchange traded fund finished 2022 in the red.
That appears to be a distant as GLD is higher by 5.38% year-to-date, perhaps indicating market participants are buying into the notion that the Federal Reserve will modestly raise interest rates just a couple of times in the coming months and halt the tightening cycle soon thereafter.
Interestingly, ETFs, which are among advisors’ and clients’ preferred ways to access gold, are only seeing modest inflows amid the 2023 gold rally.
"Still the move in gold, up 6.5% year to date and up 20.3% from the bottom last year reached in late September, has not yet triggered a renewed inflow into gold ETFs," notes Christopher Wood, global head of equity strategy at Jefferies. "Indeed global gold ETF holdings have declined by 16.2 tonnes so far this month to 3,456.3 tonnes as of 20 January, according to the World Gold Council."
Gold Outlook Not Perfect, But Improving
The primary reason gold disappointed last year was that the yellow betrayed, sort of, its reputation as an inflation-fighting asset. However, bullion’s 2022 retreat wasn’t terrible when considering it’s an rate-sensitive asset and the Fed boosted borrowing costs seven times last year. Looked at differently, gold isn’t a risk-free bet today, but its outlook is improving.
“The lack of inflows is a short-term risk following the outflow which hit gold ETFs last year. Global gold ETF holdings declined by 428.1 tonnes last year from the peak of 3,900.6 tonnes reached in late April to 3,472.5 tonnes at the end of 2022," adds Wood. "The other risk is that, as inflation collapses on the base effect in the first half of this year, real interest rates will rise at the short end if the Fed keeps hiking or even stays on hold."
The Jefferies strategist says gold pullbacks could be buying opportunities – heartening commentary that missed out on the start of the 2023 resurgence.
"Still any such correction in gold will be a buying opportunity on GREED & fear’s base case, namely that a recession is coming in America along with a change in Fed policy," Wood said. "Meanwhile, if renewed inflows into ETFs is what is needed to confirm a new bullish trend in gold, if ETFs have not been the marginal buyers of gold of late the question becomes who has been."
Other Factors in Gold’s Favor
A pair of other factors also bode well for gold in 2023. First, global central banks are likely to remain diligent buyers of the yellow metal. Second, the U.S. dollar, in which commodities are denominated, is likely to retreat somewhat.
The extent to which the dollar declines remains to be seen, but it’s not a stretch to say that after the last year’s performance the US Dollar Index (DXY) is overextended and its current bull market is getting long in the tooth.
“The second observation we make is that the price cycles of the DXY tend to last about 8 years. The most recent cycle started around 2010. That makes the current strengthening trend a bit long in the tooth at roughly 12 years. The dollar’s strength may have hit its cyclical peak, and the current pullback is more than temporary,” according to Research Affiliates.
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