Gold 2023 — can it breakout at last?

Inflation was subdued in 2020 and not an issue, yet in August that year gold hit its highest ever price of US$2,075.88 per ounce.

In 2022, with inflation in full swing, the gold price did get over US$2,000/oz — but could not stay there.

That burst occurred in March last year, and was triggered by Russia’s invasion of Ukraine.

In fact, gold ended 2022 pretty much in the same place as it started the year on 2 January – that is at about US$1,830/oz.

Silver performed similarly – beginning and ending the year at around US$23/oz.

Gold price ignores war and inflation

In other words, in 2022, a year which saw the greatest inflationary burst in 40 years, gold prices largely ignored that occurrence.

And, by the latter part of the year, gold prices were also largely ignoring the Russian-Ukraine war.

A major war and major inflation both occurred: the two key ingredients which by all economic textbook standards should see the gold price soar. But it didn’t.

This leaves a major question in terms of what it’s going to take in 2023 to get the gold price above, and well above, the US$2,000/oz mark and able to sustain that.

Central banks do about-face

In 25 years, some of the world’s central banks have done a complete about-face on gold.

Back in 1997, Australia’s Reserve Bank sold off 167 tonnes of gold, while Argentina divested 125t.

In 1998, Belgium’s central bank was among those selling – disposing of 299t.

But the doozy was the Bank of England, which between 1999 and 2002, unloaded 401t at an average US$275/oz.

So heavy was the selling that the Europeans locked themselves into an agreement to limit the offloading of gold.

But 2022 saw a completely different picture.

Central banks bought up gold at the fastest pace since 1967.

The World Gold Council in November estimated that central banks had since January acquired 673t, but that is an estimate because we don’t know if there were gold purchases that have not been disclosed.

China and Russia are the main suspects when it comes to piling up gold reserves without making it public. China bought 32t in December, taking the country’s total holdings to 1,190t. However, it is now widely accepted that the Chinese buy figure in December was closer to 300t.

Turkey, Uzbekistan and others were buying with their ears pinned back. Qatar doubled its hold reserves.

Certainly, Banca Italia, the Italian central bank, is a big believer in gold — it holds 2,451t. Only the US and Germany own more (and presumably so does China if it owned up to the real size of their stash).

Banca Italia makes no secret of its enthusiasm for gold, with the following posted on its website:

“Gold is an excellent hedge against adversity. Another good reason for holding a large position in gold is as protection against high inflation since gold tends to keep its value over time.”

GFC prompted change of heart

The sell-off of gold reserves dried up after the Great Financial Crisis of 2007-2008.

By 2012 the central banks were back in the gold market, but this time as buyers. That year saw them acquire a total of 534.6t.

The central banks of Brazil, Paraguay, Iraq and Venezuela were among those topping up their piles of gold bars.

And in mid-2015 we had Austria follow the lead of Germany and the Netherlands in deciding they were not comfortable with a large proportion of their gold sitting in foreign vaults and so arranged to have some of the bullion repatriated.

Vienna had only 17% of its 280t on hand, with 80% of its gold held at the Bank of England. Over the next few years, it intended to move much of that to Vienna and Switzerland.

Meanwhile, Jordan in 2015 joined the ranks of the central banks to be making the decision to buy more gold, while Kazakhstan added a few more tonnes in March that year to get over the 200t level, more than double where its reserves had stood in 2012.

Outlook for 2023

Will rising interest rates keep gold — which pays nothing — subdued as an asset? That is the conventional view.

One hesitates to look to further inflationary pressures giving gold a boost after the initial breakout of prices failed to do so in 2022.

Unless the Ukraine war spills over into Europe proper, which seems unlikely given Russia’s now apparent military limitations, that conflict is not likely to raise the global geopolitical crisis level to any extent.

The major factor on the gold is clearly central bank buying, and 2023 may see the implications emerge more clearly.

Central bankers don’t do things on a whim, so why are they so heavily buying gold? The big takeaway is that many central banks now accept that gold is money.

Meanwhile, China seems to be moving to internationalise its markets, with its presumed massive gold holdings backing the yuan as a new world currency.

Alasdair Macleod, of London-based Goldmoney, points to China’s plan with Saudi Arabia for oil to be paid in yuan as a sign of the waning power of the greenback.

More such deals are anticipated that by-pass the US dollar as the trading currency.

Once that concept spreads to the private investor, gold may be on its way upwards at last.