Anticipating Gold’s Position in 2023: The Role of Safe Haven Demand

Much of gold’s recent climbs to the $2,000-per-ounce level can be attributed to one factor: safe haven demand. As economic uncertainty and inflation run high while geopolitical tensions worsen in the Middle East, investors and central banks alike flock to the secure, value-storing asset. While gold may experience short-term pullbacks from high interest rates, its status as a safe-haven commodity has provided it with long-term pricing support throughout the year.

As we look toward the end of 2023 and into the next year, the question on many investors’ minds is, “What will the future hold for gold?” While predicting any asset’s performance rates requires an array of complex nuances, gold’s general highs and lows can be traced by the level of safe-haven demand. A solid, strong economy allows traders to invest in riskier assets, though one riddled with inflation, fears of a recession, and risks of conflicts or wars will likely turn traders to the precious metal safety net.

Given the current economic and geopolitical state of the globe, most analysts expect positive movement for gold moving into 2024. Safe-haven demand continues running high on a global scale as economies around the globe battle high inflation levels while the Israel-Palestine war deepens day by day.

“Gold has been a hot commodity in 2023. The strong demand for the precious metal is likely to continue throughout the rest of 2023 and into 2024,” a news report from CBS stated. “With the price of gold being beholden to the law of supply and demand, that means now is a great time to dive into the commodity.”

While inflation may be cooling in certain nations, that also means central banks are coming to the end of their interest-rate-hiking cycles, allowing non-yielding assets like gold to gain more attention. With the Federal Reserve cooling its monetary policies while fears still remain high on a global scale, gold gains the perfect environment for thriving.

“Inflation has cooled off, but the Fed’s overall progress in the battle to tame higher costs has slowed in recent months,” the CBS report continued, adding that gold “has historically been known for the help it can provide during inflationary periods by keeping [its] value (or increasing) when the purchasing power of the dollar has fallen.”

Analysts urge that investors see gold’s potential as a long-term inflation-hedging tool rather than a short-term trading commodity. While gold may show volatility during shorter periods when the U.S. dollar suddenly spikes or interest rates go up, the precious metal typically trends up over time.

Looking forward, experts like David Meger, the director of metals trading at High Ridge Futures, believe that gold will remain strong going into 2024 as the Middle East conflict drives safe-haven demand. “Safe-haven demand will continue to drive gold higher after a slight period of consolidation. We believe geopolitical tensions and the uncertainty in the Middle East will continue to drive prices higher,” Meger explained.

Aside from investor demand, central banks are providing critical support to the precious metal as well, and the World Gold Council expects this trend to continue. China has now stockpiled gold for 11 consecutive months in an effort to devalue the U.S. dollar and build its reserves with a universal, secure currency.

“China and others (like Russia) have employed gold to mitigate the impact of USD weaponization and potentially exert influence on the global financial system,” a report by Sprott explained. “Gold is critical for China’s currency management due to external selling pressures and its longer-term goal to internationalize the RMB. China’s commitment to bolstering its gold reserves has been unwavering throughout the past decade, driven by China’s need to enhance its economic and geopolitical standings.

China currently carries around 2,113 tons of gold in its reserves, though the precious metal only accounts for 4% of its total reserves, which may explain its recent aggressive stockpiling strategies. During the first nine months of 2023, central banks purchased 800 tons of gold, and 181 of these tons came from China.

Nations like China and Poland are continuing to provide critical pricing support to gold, regardless of how all other demand sectors perform. According to a survey conducted by the World Gold Council in May, 23% of central banks intended to increase their gold holdings in the next 12 months, with 62% planning on creating a greater share of gold in their holdings.

So far this year, gold has increased by 6.39%, keeping it on track to reach its average 7.78% annual gain, according to Statista data measured from the years 1971 to 2022. As always, investors should consult their advisors before making any portfolio decisions.

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