Gold Stocks Are Rising In 2023

Key Takeaways

• Gold grew in value in 2022, but only by 1.3%, well below expectations.
• Gold prices were hindered by aggressive Federal Reserve rate hikes, diminished demand in China, and the rising value of the U.S. dollar.
• In 2023, many analysts predict that gold is going to experience a sharp rise in value yet the same uncertainties around federal interest rate hikes and pandemic policies in China cast a shadow on hopeful predictions.
• Whether or not gold prices skyrocket in the short-term is largely a moot point, it’s long-term stability is its biggest strength, which means its best value to investors is in volatile times is to buy-and-hold and to offset riskier investments like stocks in your portfolio.

It’s not that 2022 was a bad year for gold – there was growth. But its value didn’t grow nearly as much as analysts were expecting and investors were hoping.

In 2023, predictions are more optimistic, but it’s important to remember that they’re just predictions. If 2022 fell short, it’s entirely possible that 2023 misses the mark, too.

A lot of the uncertainty hinges on the same economic drivers that slowed gold’s growth in 2022, such as increasing interest rates, rising values of U.S. Treasuries, a potentially strong U.S. dollar, and the uncertainty surrounding demand in China, which is gold’s largest market.

Despite uncertainty and potential headwinds, gold has plenty going for it in 2023, too. The Fed is still raising rates, but slowing its pace. Although the loosening of COVID policies had a negative impact on China’s economy in December 2022, these same policy reversals should lead to a more robust GDP in China.

While short-term speculation is interesting, it’s not what most investors should focus on when investing in gold.

Gold is Widely Considered an Inflation Hedge – But is it?

Currency is only as valuable as society says it is. Gold, on the other hand, is a tangible asset, and a finite one. That means even when paper money loses value, gold should hold its own. Hence, gold is widely considered to be an inflation hedge. If we didn’t measure the value of gold in currency, that assessment would be true 100% of the time.

But we do measure the value of gold in currency, so there are other mitigating factors that impact the value of this commodity.

For example, America’s last period of significant inflation started in 1973 and extended throughout the rest of the decade. During this timeframe, gold did follow the rule of being an inflation hedge. Its annualized return was 35%, even while inflation reached 8.8%.

But the pattern didn’t continue indefinitely. Inflation got a little bit better, but it was still very high through 1984, when inflation averaged 6.5% and gold decreased in value by 10% each year. While neither inflation or decreases in the value of gold were quite as dramatic from 1988 to 1991, we also saw a negative return on gold during this period of mild inflation, too.

The rule of thumb that gold is an inflation hedge needs to be re-examined, experienced investors approach gold with more nuance, especially coming off a year like 2022.

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Why Gold Underperformed in 2022

While gold did go up 1.3% in 2022, inflation peaked at 9.1% in June 2022. If inflation were the only thing that impacted the value of gold, we would have expected to see prices surge much higher than they did.

But other factors impact the value of gold, too. First, the fact that the Fed started aggressively raising interest rates means that the values of U.S. Treasuries went up. When U.S. Treasuries go up, it has a negative impact on both gold and bonds.

As rates go up during a period of such uncertainty across the globe, the value of the U.S. dollar goes up, which we saw happen throughout the year until the tail end of 2022. As the value of the dollar goes up, it becomes a safer investment, reducing the demand for gold, and the price of this precious metal, by extension.

Gold is Expected to Rise in 2023 as U.S. Dollar Weakens

Starting in late 2022, gold futures started an upward trend. This was just as the U.S. dollar started softening in value. While there will be bumps one way or the other, the overall outlook for gold in 2023 is shiny.

No prediction is guaranteed, commodities are extremely volatile over the short-term, and this particular outlook hinges on the U.S. dollar continuing to soften, in concert with a few other factors. But we’re already seeing some early signals in this vein.

The U.S. dollar may reverse course once again as the Fed is expected to continue raising rates throughout 2023, though the latest rate hike revealed a slowdown in their pace. These rates also affect the value of U.S. Treasuries. If the dollar stays strong, that makes it harder for gold prices to jump up.

Even if rates do come down, a positive year for gold also includes an expectation for higher demand in China with COVID-19 restrictions finally loosening. But what we saw in December was a Chinese economy that reacted negatively to the recent swing in COVID-19 policies, with business closures, labor struggles and many choosing to stay home.

As the virus spreads throughout the country, there’s no way to tell if the Chinese economy will be more or less functional than it has been over the past few years.

Long-Term Outlook on Gold

Gold, like other commodities, can be subject to extreme swings in value over short time horizons. However, over the long-term, gold is generally viewed as an extremely stable investment.

For example, on February 10, 2012, gold futures were trading for $1,725.30. As of Jan. 6, 2023, they were trading at $1,870.50. There have been a lot of ups and downs in between. Gold futures dipped to their lowest level of $1,056.20 on Nov. 27, 2015 and soared to their highest on Aug. 7, 2020 at $2,028.00

While there have been peaks and valleys, the price of gold hasn’t changed that much over the long-term when you account for inflation. That’s why it’s seen as a conservative, buy-and-hold investment.

Bottom Line

A good portfolio has a mix of both risky and conservative investments. Holding a conservative investment like gold over the long-term can be a good way to offset riskier investments in your portfolio, like stocks. Both are necessary, and your asset allocation will depend on your financial goals, risk tolerance and duration of investment.

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