Gold has had a rollercoaster ride in 2022 with several factors, both supportive and negative, impacting the sentiment. Ultra-accommodative monetary policy resulting in massive liquidity infusion and low interest rates caused inflation which boosted the metal price in the initial months of the year.
Gold is known as a hedge against inflation. The US faced inflation in excess of 8 per cent, a 40-year high. Other countries were not far behind.
But the Russian invasion of Ukraine spooked all commodity markets. It propelled gold even higher to breach the psychological $2,000 a troy ounce in March.
In the months that followed, gold could not hold on to the gains and started to slide to reach a low of $1615/oz by September following strong appreciation of the dollar and rise in US bond yields as a result of steady hike in key interest rates by the US Federal Reserve.
During the year, the dollar reached a 20-year high to be on par with the Euro. While the strong dollar became a safe haven, holding gold became less attractive. Gold is a non-interest bearing investment. No wonder, outflow from exchange traded funds (ETFs) continued from May to November as institutional investors had other avenues.
However, in November with inflation showing signs of softening and the Fed signalling a slower pace of future rate hikes, the metal again got a boost of almost $200/oz. So, the gold market is ending the year almost flat which is an improvement over a 6 per cent negative return in 2021.
Where would the gold market go from here? In 2023, inflation rates are likely to fall from the current highs following monetary tightening. But at some stage, perhaps in the second or third quarter, the Fed may be forced to pause the rate hike to counter looming recession risk. It may also open up the possibility of a rate drop by the Fed if the economic situation warrants.
In the event, the dollar would weaken from the current levels and bond yields decline. This would create a favourable backdrop for gold prices to rise. So, for gold, 2023 would be a year of two halves. In the first half, the yellow metal may continue to be under some pressure facing the headwinds of strong currency, bond yields, inflation and possibly two more rate hikes.
As a result, in the first half, the yellow metal is likely to trade in the $1750-1850 range. But in the second half as headwinds recede and support factors take over, the precious metal may rise higher to the $1800-1900 levels.
Silver: It is not only a precious metal but also an industrial metal with varied applications. Usually, silver hangs on to gold’s coattails. In 2022 like gold, silver too had a mixed year initially rising to reach $ 27/oz by March and then steadily declined for almost six months, reaching a 2-year low of $17.5 by early September.
Silver enjoys a strong upside price potential in 2023 as the supply-demand fundamentals are tight. The market faces a deficit of about 6,000 tonne of the metal. Demand for coins, bars, jewellery and silverware is expected to pick up.
Electrification, 5G technology, green infrastructure – all these are set to boost silver demand. Inflation fears may encourage physical demand too. Silver may rise by at least 10 per cent from the current levels to first reach $25/oz and then test $27/oz in the second half of 2023.
As usual, our domestic bullion market will continue to reflect global developments as India is still a price taker and not a price setter despite large import volumes. The rupee price of both gold and silver is set for an increase during 2023. From the current levels, gold may touch ₹60,000 per 10 grams while silver has the potential to reach ₹70,000 a kg in the latter half of the year.
The writer is a policy commentator and commodities market specialist. Views expressed are personal