Gold reaches $1,850 per oz on the back of dropping dollar index – new peak ahead?

YEREVAN (CoinChapter.com) – Gold prices surged 2% weekly to reach $1,850 per ounce on March 6. At its local peak on Feb.2, the precious metal was changing hands for $1,960.

New peak underway for Gold?

The markets have not been stable since the pandemic in 2020. Additionally, the recession fears due to the Fed’s quantitative tightening policies exacerbated investor fears. Thus, they responded to the uncertainty by directing their funds into safe-haven assets like precious metals.

Subsequently, abundant inflow into the gold market boosted the XAU spot price, which peaked at $2,070 on Mar 8, 2022, its highest value since the ’60s. However, a decline followed, and the XAU price bottomed out near $1,800 on Feb 27.

Moreover, several experts have predicted a profitable year ahead for gold investors as the global turmoil continues.

Experts predict a gold rush in 2023

For example, Ole Hansen, head of the commodity strategy at Danish Saxo Bank, predicted a rise in gold prices in 2023 to continue.

In general, we are looking for a price friendly 2023 supported by recession and stock market valuation risks. The de-dollarization seen by several central banks last year when a record amount of gold was bought looks set to continue, thereby providing a soft floor under the market.

said Hansen.

Eric Strand, manager of the Gold Mining ETF AUAG ESG, also agreed with the bullish outlook. He commented that the precious metal would likely hit a new record high in the current year.

Central banks as a group have continued, since the great financial crisis, to add more and more gold to their reserves. […] It is our opinion that central banks will pivot on their rate hikes and become dovish during 2023, which will ignite an explosive move for gold for years to come.

asserted the expert.

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Much of the 2023 outlook for global markets hinges on the trajectory of monetary policy. Notably, the XAU price increase came from the dollar index (DXY) decline due to the Fed’s relatively dovish policies.

Will DXY sink?

In detail, the dollar index measures the greenback’s strength relative to the basket of 6 foreign currencies. Thus, when the Federal Reserve implements interest rate hikes, the dollar index typically picks up accordingly, commanding the investors’ increased interest. The chart below demonstrates the erratic inverse correlation throughout the decade.

However, despite the Fed’s decision to continue the interest rate hikes into 2023, the increases will likely be by 25 basis points, which is a dovish shift compared to Q1-Q3, 2022. Thus, an increase in Gold spot price could be in the books against the possible DXY decline.

Additionally, the latest Federal Open Market Committee (FOMC) meeting minutes released on Feb 22 showed that most Federal Reserve officials agreed to slow the pace of interest rate increases to a quarter of a percentage point.

FOMC meeting participants also concurred that the agency had made “significant progress over the past year” in moving toward a “sufficiently restrictive stance” of monetary policy.

Even so, participants agreed that, while there were signs that the cumulative effect of the Committee’s tightening of the stance of monetary policy had begun to moderate inflationary pressures, inflation remained well above the Committee’s longer-run goal of 2% and the labor market remained very tight.

stated the minutes.

The DXY might not sink as a result of the dovish policies. However, another peak is equally unlikely, allowing Gold to attract investors and possibly reach a new local high.

Additionally, the current market expectations are that interest rates will hit 525-550 bps by the end of Q2, up three-quarters of a percentage point from the current target rate of 450-475bps. Any deviation from this expected path of rate hikes will add volatility to the greenback, further propelling gold.

Hansen agreed, saying, “if we see any signs of weakness in economic data and it results in lower rate hike expectations, it will be supportive of gold.”

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