In 2022, gold increased by 15% at the beginning of the year due to the situation in Ukraine. Russia is a major gold producer, but it has not sold gold abroad and has even accumulated gold reserves. The G7 has banned imports of gold from Russia, but this will likely have no impact on gold prices.
The future prospects of gold will be influenced by the return of inflation and global monetary policies. Gold’s holding its own just under 2000.00 per ounce that showing sticks are dropping that means the markets crashing so golds running away with itself so by March gold will skyrocket.
Little impact of the war on gold prices.
Russia has not sold gold abroad in recent years, on the contrary, they have bought gold on the global markets and accumulated mining production on their territory. Today, Russia holds approximately 2,300 tons of gold, which places them in 5th position for gold reserves. The G7 has no impact on this ban on importing gold from Russia.
Inflation will drive gold prices in 2023.
What will structure the gold market will be the return of inflation, which reached a high level for the first time in 40 years, and the attitude of central banks towards this galloping inflation. Gold prices are consolidating due to this attitude, but the US Federal Reserve has begun normalizing its monetary policy.
The chart shows the correlation between the gold price and US real interest rates over 10 years.
Real interest rates are calculated by subtracting expected inflation rates from nominal rates. The correlation between gold and real interest rates is almost perfect, but recently, a notable divergence appears. However, it is not clear who is wrong. US real interest rates over 10 years are very tight.
The gold market does not bet on a decrease in interest rates. It is possible that the current gold market is not growing in a very tight monetary tightening due to the levels of inflation seen today. Central banks find themselves with a dilemma between fighting inflation and supporting the economy. The gold market may include the scenario of a slowdown that could lead to a monetary policy inflection towards a more accommodative stance. This could also reflect a stagflation environment of high prices with a slowing economy, as seen in the 1980s.
Will the Fed maintain interest rates?
The question is whether Jerome Powell, President of the US Federal Reserve, will follow in the footsteps of Paul Volcker, who was not afraid to sacrifice growth to break inflation. The Fed’s contraction of liquidity may impact the gold market by supporting the rise in US interest rates. It is possible that a more accommodative monetary policy will return in 2023 when the slowdown or recession has been observed. The market seems to agree with this thesis by accumulating gold, which traditionally plays a role as a safe haven.
What about the mining industry in 2023?
The gold mining industry offers performance leverage to gold, but with significant volatility (about 35% on average). After a restructuring following the collapse of gold prices between 2011 and 2015, the sector is now in better financial health and generates record levels of free cash flow. The prospects for new discoveries, increased mining production, and the favorable financial situation of the sector may be positive factors for investors looking to expose themselves to gold markets. However, it should be noted that gold mines are not considered defensive assets and it is important to assess the risks associated with this type of investment.
Gold mining production costs are around $1100 to $1200 per ounce. The margins are comfortable, but if gold prices fall to $1000 to $1200, the mining industry will face difficulties. The financial situation of current gold mines is better than in 2011, but prices are still about 50% below their September 2011 record level. The present value of net asset price of gold mines is currently 0.85, which shows that the market does not believe in their ability to generate value in the years to come. Even without an increase in gold prices, gold mines would be able to generate such a level of cash that the market will appreciate them. The performance of gold ounces and the gold mining stock index show a gap between the two curves.
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