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Where to for Gold in 2023?
After an average 2 years or so for gold prices, the past 6 months have been better with a 19% gain. Why has the gold price performed better in recent times and will the run continue?
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Gold in 2023: Why it has been a success
Gold is experiencing a strong performance in 2023 for several reasons. Firstly, the global economic uncertainty, particularly high inflation and the banking crisis triggered by the collapse of Silicon Valley Bank, has pushed investors towards safe-haven assets. This precious metal has arguably the best reputation as a safe-haven investment.
Additionally, the ongoing inflationary pressures and the possibility of rising interest rates have made commodities generally a more attractive option for investors who are looking to protect their wealth.
Finally, the ongoing geopolitical tensions, particularly between the United States and China, have also contributed to the rise in gold prices. As uncertainty continues to loom, investors are turning to the precious metal as a hedge against potential political risks.
In summary, gold’s strong performance in 2023 can be attributed to a combination of factors, including economic uncertainty, inflationary pressures, strong demand from emerging markets, the popularity of ETFs focused on this precious metal and geopolitical tensions.
Miners and funds are capitalising
Nevertheless, there are further reasons why gold miners and ETFs have been successful of late.
Demand for the commodity from emerging markets, particularly China and India, has remained strong, with both countries experiencing rapid economic growth. It appears that Australian miners have not been as impacted by adverse weather or labour shortages as other mining companies have.
Furthermore, there has also been a fair amount of M&A activity relative to other sectors. In February, Pantoro (ASX:PNR) and Tulla Resources (ASX:TUL) agreed to merge. This came just a week after Newmont, the world’s biggest miner, made an offer to buy Newcrest Mining (ASX:NCM). The initial offer was US$17bn, but the latest offer (made in mid-April) is US$19.5bn.
With only US$2.5bn of deals completed in 2021, down 86% from 2021, it is hard to argue the market is not due to bounce back. This deal alone would boost the M&A market and the broader commodity markets. Keep in mind that Newmont is already the world’s largest gold producer by market value and ounces produced, and snapping up Newcrest would result in nearly twice as much production.
What about gold ETF’s?
Turning to gold funds, the increasing popularity of exchange-traded funds (ETFs) focused on this individual commodity – either mining companies or just the spot price – has also helped.
Examples of ETFs on the ASX include Global X Physical Gold ETF (ASX:GOLD) and the VanEck Gold Miners ETF (ASX:GDX). Funds such as these have made it easier for investors to access the gold market and demand for them has been steadily increasing.
So where to next for gold?
Investors are watching closely to see where the precious metal is headed next. Overall, it is anyone’s guess because there are both tailwinds and headwinds.
Let’s look at the unfavourable factors. Keep in mind that higher interest rates and a strong US dollar make gold less unfavourable – the latter particularly so for foreign investors.
It appears US banking crisis has been resolved – at least for now. But if the dominos start falling once more, investors appetite for the precious metal might rise again. And gold companies, even successful ones, will never be as sexy to investors as battery metals stocks given the exponential growth in demand for these companies.
Now let’s turn to the favourable factors for gold. Even if no other M&A deals get done, the Newmont-Newcrest tie up will ensure 2023 is a better year for the market than 2022. And while central banks are hoping for a ‘soft landing’ to lower inflation (in other words, slowing growth without a recession), a ‘hard landing’ (a recession) would help the cause of gold.
Investors will need to continue to monitor all these factors closely to determine the direction of gold prices in the coming months.
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