Gold outlook for 2023: What's the potential for record highs?

With worries of a recession followed by a potential Fed pivot, gold was set for a volatile year. Now the BOJ has added another element to the mix.

Gold's moment in the sun

At the end of the year, gold caught a substantial bid as the dollar weakened. There were a couple of reasons for this, but the most dramatic was the surprise move by the BOJ to widen the band of its yield curve control policy. Beyond the impact on the yen, it was seen as increasing capital costs worldwide, as Japan is the largest creditor. It was also seen as opening the door to the BOJ joining the global move towards tightening, which would contribute to tighter liquidity conditions. In general, that is seen as positive for gold, as investors look to hedge their risk ahead of a turbulent economic situation.

That came in a context where China is seen as lifting restrictions on covid. Even though case numbers have increased recently, and more reported deaths, the government didn't announce more stringent measures. Although reopening might provide a more optimistic outlook in the medium to long term, the increase in work absences as covid moves through the population could affect supply chains and production through the winter. That could cause gold demand fluctuations, as China is the largest retail buyer. The Chinese government, in parallel, announced it would be taking measures to boost internal demand.

Waiting for the landing

The main uncertainty going into next year is just how hard the landing will be. The higher interest rates and still high inflation are expected to keep investors worried until March. At that point, some of the uncertainty could be resolved, such as how Europe will fare through the winter, whether China is back to growth following the spread of omicron, and potentially the results of a "last push" in the war in Ukraine.

Uncertainty helps support gold, but resolving it could bring prices down unless the situation is such that the Fed decides not to keep rates elevated, which could further weaken the dollar. Like dollar strength was a central theme in 2022, the inverse could be the primary driver for 2023.

Gold 13% up since November

Gold prices have soared nearly 13% since the beginning of November after having completed a falling wedge pattern at $1620/oz (S3). Typically, wedges offer reversals if not deep pullbacks. Currently, the bulls face the first peak following the initial downward legging from $2080/oz (R3) to $1680/oz (S2), near $1820/oz. A break above there opens the door to the record high, but it might struggle to get past $1900/oz (R1) and the $2k (R2) handle. On the other hand, a rejection might see the commodity slide towards $1750/oz (S1), the second wedge peak. Below, there is interim support at $1680/oz (S2).

Key takeaways

Gold is set to have a volatile year in 2023, with worries of a recession and potentially elevated rates and inflation. The BOJ's recent surprise policy move has added another element of support for the safehaven, and China's expected return to growth could help support gold prices further. But a resolution to some of the major uncertainties, such as the outcome of the winter in Europe and China and the situation in Ukraine, could also pressure prices down.