The year 2022 so far has been rough for investors. Inflation rages across the globe, with costs of energy and food reaching historic levels. Hostilities between the East and West — already high with the Russian invasion of Ukraine — have accelerated with China/Taiwan tensions.
The Federal Reserve’s increase in interest rates has been ineffective in reducing prices while sending stock, bond, and real estate markets into steep declines.
Meanwhile, gold again proved its value with its price stability during the first half of 2022, compared to stocks and bonds. As of the publication of this article, diversifying with the physical metal has proven to be a “golden parachute.”
But with high inflation, a possible recession, the war in Ukraine, and rising tensions between China and Taiwan/the US, what might the next year look like for gold prices? Let’s first look at what may impact the price of the precious metal.
Inflation, interest rates, and recession
Fed Chairman Powell, testifying before Congress in June, claimed that higher interest rates would continue until inflation rates were clearly falling while he discounted the risk of recession. But by definition, the U.S. is already in a recession: The economy experienced negative growth in the first two quarters of 2022. This is also completely logical when you consider that, historically, every bout of high inflation is followed by a recession.
Assuming we are going into a recession — if we are not already in one — as a recession’s impact on the economy grows, historically the Fed wanted to ease the pain by lowering interest rates and increasing the money supply, so Powell & Co may soon have to rethink their anti-inflationary monetary policies and possibly reverse the rate hikes to counter the recession.
The gold price typically goes lower when interest rates rise, though slower and to a lesser degree than other investments. When interest rates fall, the price of gold tends to increase.
Gold demand, the dollar, and the price of gold
Many countries began reducing their foreign reserves of US dollars with gold in the past decade. The excessive supply of dollars — a stunning 3,000% increase in 50 years — and years of low interest rates prompted foreign central banks to build gold foreign central banks to build gold reserves. This move and trend historically lowered the demand for the dollar increasing the price of gold.
Another short-term factor is that the dollar has strengthened against other currencies in recent months due to the Fed’s interest rate raises with little impact on the price of gold. So, if the Fed finds it necessary to lower the interest rates soon to stimulate our economy in a recession, it may weaken the dollar and send gold prices higher while also increasing the demand from central banks.
Competition and the dollar
The rising competition with China and the Eastern Bloc’s desire to replace the dollar as the world’s reserve currency could lead to the weaponization of the dollar against the United States. Imagine the financial chaos if China were to sell its almost $1 trillion in dollar reserves?
What’s in stock for the price of gold?
While I don’t have a crystal ball, I believe the decade may continue to be bullish for gold. Many investment analysts agree. Projections for future prices in 2022–2023 range from a low of $1,950 to $2,000 by Australian bank ANZ and Citi Global Wealth Investments, respectively, to over $3,000 per ounce by Wallet Investor. Rich Checkan, President of Assets Strategies International, projects gold at $2,400, rising to $3,500 before the start of another economic cycle.
Longer term considerations may be made with a view to the 1970s, where we had the same high inflation rates as today and very low GDP growth like we have now. It lead to stagflation then. Under those circumstances, the gold price went up 2,300% during that decade. With so much uncertainty regarding our economy, being certain with a portion of your savings in gold will get you diversification that, throughout history, helped mankind go through difficult times.
