Gold Q4 outlook 2023

Exploring the shifts in gold prices amidst central bank strategies and global economic uncertainties

By Raed Alkhedr | @raedalkhedr | 1 November 2023

Has gold lost its lustre_
  • Despite a downward trend since May 2023, gold prices face fluctuations, with geopolitical tensions pushing prices toward $2000.

  • Central banks globally are diversifying portfolios by increasing gold reserves, a trend accentuated by inflation concerns.

Since the beginning of May 2023, gold prices have been on a clear downward trend. This was influenced by the monetary policies adopted by most central banks and a global decline in demand for precious metals. Anticipated expectations indicate that gold is likely to continue its decline throughout the last quarter of 2023.

Geopolitical headwinds pull gold prices closer to $2000, despite being on a clear downward trend since the beginning of May 2023. Markets were reshuffled in Q4 with safe havens being pushed to the top.

Influenced by tight monetary policies adopted by most central banks and a global decline in demand for precious metals. Anticipated expectations indicate that gold was likely to continue its decline throughout the last quarter of 2023. However, this theory has now become somewhat distorted after the rise of geopolitical tensions.

Central bank policies pressured gold

Gold prices have faced significant drops over the course of the year. Despite the initial worries regarding an economic downturn and other factors; the overall trend for gold prices has been down, falling from $2,077 per ounce to around $1,839 per ounce.

One contributing factor to this could be the US Federal Reserve’s choice to maintain interest rates at their current levels in both June and September. This decision gave rise to the anticipation that the economy could experience a ‘soft-landing’, effectively averting a recession.

While the September meeting kept the possibility of raising rates in the fourth quarter open, it’s still uncertain whether the FOMC will need to take such action. Especially given the observed trend of diminishing inflationary pressures across various sectors of the economy.

Inflation concerns begin to fade

In 2022, inflation was a significant problem for the global economy, which saw increased demand for gold as a primary hedge against rising prices. This increased demand played a pivotal role in driving gold prices to surpass $2,000 per ounce.

Yet as the global economic situation seemed to stabilise, gold prices began to decline as central banks led by the US Federal Reserve began tightening monetary policies to return inflation rates back to target. US inflation rates have slowed from their 2022 peak of 9.1% to the current rate of 3.7%, with the Fed’s target currently remaining at 2%.

Oil prices & Geopolitics could boost gold

Signs that inflationary pressures are finally starting to ease are being seen in most major developed economies, particularly in the UK and EU. This is raising collective hopes that the current cycle of tightening has now come to an end, or close to the end, allowing for a pick-up in risk appetite and a decrease in demand for gold as the primary hedge against inflation.

However, a potential fly in the ointment is the oil price, which has risen to over $90 per barrel on the back of supply cuts by some members of OPEC+. Some forecasts are suggesting that oil prices could climb back to over $100 per barrel, which could once more provide a boost to the gold price as fears over global inflation resurface.

Additionally, with geopolitical tensions now resurfacing from the Middle East, if these tensions escalate, gold prices could potentially visit the $2015-$2050 level. With $2050 serves as a strong resistance point previously visited in 2020, 2022 and May 2023.

On the downside, if gold prices give up its safe-haven gains that were triggered this month, an extension to its decline towards the $1900’s is more than possible taking geopolitics aside.

Should prices manage to sustain a weekly closing above $1975, it would serve as a supporting element for the rally on the shorter time frame. On the contrary, a notable aspect to consider is that the rally occurred swiftly, and consequently, any potential reversal could also be swift.

Central banks increase gold reserves

Recently, some central banks have shown a willingness to increase their gold reserves in efforts to hedge against inflation. Geopolitical tensions have further encouraged certain central banks, especially in emerging market economies, to boost their gold holdings while reducing their exposure to the US dollar.

A report by the World Gold Council showed that central bank demand for gold reached a record high in Q1 2023 with 228 tons added to official gold reserves, a record pace for the first three months of a year since data collection began in 2000. During the first half of the year, central banks’ gold purchases increased by 387 tons despite a slowdown in Q2 purchases.

China has been at the forefront of countries augmenting their gold reserves, with the People's Bank of China persistently acquiring gold as part of its foreign exchange reserves. For ten consecutive months through August, China amassed a total of 217 tons. Concurrently, China’s holdings of US Treasury bonds have dwindled to their lowest levels since June 2009. India, Brazil, and Turkey have followed also suit by buying gold in a bid to reduce their reliance on the US dollar and stabilise their domestic currencies.