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Should you buy gold amid central banks being on a buying spree?

By:
on Dec 22, 2022
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  • Central banks have been buying gold at the fastest pace since 1967
  • A rising wedge pattern on the daily chart calls for caution
  • Another leg higher for gold should be accompanied by a weak dollar

Until the COVID-19 pandemic, gold had a specific role in a portfolio – it acted as a hedge against inflation. Curiously enough, the gold price tumbled after inflation surged in response to the monetary and fiscal policies taken by central banks and governments.

One explanation could be that prior to the pandemic, inflation was quasi-non-existent in developed economies. Therefore, as gold kept its value and rose in time, it acted as a hedge against inflation in emerging markets. And for investors willing to put their capital in emerging markets.

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Another explanation might be that gold price acts with a lag. In other words, it is yet to respond to the high inflation environment.

Finally, it may also be that gold lost its status as a hedge against inflation. After all, it is not the first time a market, even a commodity like gold, has done so.

Now that we move straight to 2023, the big question for those looking for a hedge against inflation is – should they invest in gold?

Judging but what central banks did in 2022, they should. Central banks have been net buyers of gold in 2022. In fact, they’ve been building up their gold reserves at a pace not seen since 1967.

Gold price sits at crossroads

Gold reversed once the US dollar strength abated in October. Effectively, gold broke out of a bearish channel and rallied as the dollar lost ground.

But it recently formed a rising wedge pattern, which might spell trouble in the short and medium term. A rising wedge is a reversal pattern, and the price action that follows typically retraces at least half of the distance the pattern traveled.

In many cases, it fully retraces the entire pattern.

Therefore, bulls might want to hold on and buy gold only on a daily close above $1,850. Such a move would invalidate the bearish pattern and, most likely, would be accompanied by a weak dollar.