Gold Souk
Gold prices rose substantially in the past three weeks. Last week, the yellow metal even managed to shine above the $1,800 (Dh6,611) per ounce level, reaching its highest in four months. Image Credit: GN

Dubai: If you were debating whether to postpone your purchases by a couple of months from now, it would be cost effective to do so as costs are expected to soar to much higher than it is currently by the end of 2023 and beyond.

"While we expect significant price volatility going forward, we expect gold prices to remain elevated in the coming years compared to pre-pandemic levels," analysts at Fitch Solutions Country Risk and Industry Research wrote in its recent report. But how will prices move in the starting months of 2023?

While the analysts at the UK-based market researcher expect prices to ease very minimally in the longer term beyond 2022-2023, inflation, which is set to ease during the first half of next year, will later soften demand for gold as a hedge and limit the yellow metal’s price gains.

While we expect significant price volatility going forward, we expect gold prices to remain elevated in the coming years compared to pre-pandemic levels

- Fitch Solutions

Why have gold prices been rising?

Gold prices rose substantially in the past three weeks. Last week, the yellow metal even managed to shine above the $1,800 (Dh6,611) per ounce level, reaching its highest in four months. This trend is expected to continue in the weeks running up to the year’s end.

“We believe prices are likely to head higher towards $1,850 (Dh6,794) per ounce in the coming weeks, with rising investor interest to drive gains in 2023,” the analysts at Fitch Solutions further noted, which translates to around Dh220 per gram in the UAE.

Though a recent rally in gold prices has been witnessed, the same may be restricted due to future rate hikes. The interest rates in key economies have still not peaked, and are expected to continue hiking rates well into 2023 as inflation is still far off the target levels in most countries.

Gold coins, gold bars
Central banks hiking rates worldwide could restrict the gold price rally, analysts widely opine.

More rate hikes mean losses for gold

Central banks hiking rates worldwide could restrict the gold price rally, analysts widely opine. Also, in a scenario of a rising US dollar – the most used currency for international transactions – it is less likely gold would be able to make much headway to higher levels, and therefore will be more attractive to buyers.

However, central banks moderately hiking rates could raise rates of the yellow metal. With there being a link between the price of gold and the global stock markets, sales of gold coins, bars, and exchange-traded funds, and in turn their costs, soar when the stock markets perform poorly with rate hikes.

Moreover, with a more severe and widespread recession looming large gold is expected to rise beyond expectations, as it has delivered positive returns in five out of the last seven recessions. On the other hand, if global economic growth doesn’t slow as much as one fears, gold will be pressured to drop.

We believe prices are likely to head higher towards $1,850 (Dh6,794) per ounce in the coming weeks, with rising investor interest to drive gains in 2023

- Fitch Solutions

Gold is still in danger of falling lower

While gold is still in danger of falling lower and giving up its recent gains, the longer-term prospects are leaning towards prices rising as central banks shift from tightening to easing next year, when it comes to their monetary policy vis-à-vis their respective rate hikes.

“Gold has been seeing head-turning gains in November and the beginning of December this year, but the rally has a high chance of fizzling out as central banks are still raising rates amid a tightening policy,” wrote UK-based Ewa Manthey, commodities strategist at Dutch bank ING.

"We expect gold to remain on a downward trend during the ongoing rate tightening cycle," Manthey noted in its outlook for 2023. However, analysts at India-based advisor Emkay Wealth Management sees gold prices possibly trading in higher ranges and target $1,830 (Dh6,721) and $1,860 (Dh6,831) in 2023.

Stock UAE Gold
During times of economic and geopolitical uncertainty and high inflation, banks appear to be turning to gold as a store of value.

Gold demand to rebound late next year

“As the last few years have demonstrated, unexpected geopolitical events can strengthen demand for gold as an investment, as we saw at the start of this year,” wrote Juan Carlos Artigas, World Gold Council’s global head of research, in the UK-based gold authority’s 2023 Gold Market Outlook.

Artigas further noted that it is currently expected that gold demand will rebound to pre-pandemic levels next year, which will reflect in a further recovery of prices. “Pressure on commodities owing to a slowing economy, however, may provide headwinds to gold in the first half of the year,” he noted.

Further, the analysts also highlighted that the demand for gold, both among people and on a government-level, is reported to have been on a firmer footing, while also pointing out that even though a rally in gold prices was witnessed, the same may be restricted due to future rate hikes.

As the last few years have demonstrated, unexpected geopolitical events can strengthen demand for gold as an investment, as we saw at the start of this year

- Juan Carlos Artigas

Why, how is gold demand rebounding?

During times of economic and geopolitical uncertainty and high inflation, banks appear to be turning to gold as a store of value. So far this year central banks have continued to increase gold reserves.

The latest data from the World Gold Council (WGC) shows that central banks increased their buying of gold significantly over the third quarter. Central banks bought 341 per cent more gold year-on-year, which is also a record quarterly amount.

The data shows that Turkey, Uzbekistan, India and Qatar were the largest buyers of gold over the quarter, but a substantial amount of gold was also bought by central banks that did not publicly report their purchases.

Stock UAE Gold
The price of gold is affected by global jewellery demand, therefore if global jewelry demand rises, the price of gold will likely rise as well.

How does rebounding gold demand affect prices?

The pace at which central banks have accumulated gold reserves this year has not been seen since 1967. Given the current environment is likely to persist, central banks are likely to continue to add to their gold holdings in the months ahead , and this in turn will help push prices higher.

The gold purchases made by central banks around the world constitute only a portion of the total demand for bullion, which also includes the consumption of jewellery, investments in gold bars, coins and exchange-traded funds (ETFs).

But how does rebounding gold demand affect prices? The price of gold is affected by global jewellery demand, therefore if global jewelry demand rises, the price of gold will likely rise as well. If demand falls, prices will fall as well.