Gold breaks $2,000 - why, and what is the gold price forecast going forward?

Gold is back, baby. 

Not that it ever left, but returning flat in 2022 was a disappointing result in some quarters when considered against the backdrop of rampant inflation, the very thing which is meant to send gold north. 

I wrote a recent analysis last month on how the inflation narrative had fallen away and a dive into how quantitive tightening had held the metal in check. The chart below shows that notable divergence in the last year or so, with the gold price failing to follow inflation upward. 

Interest rate expectations flip drastically

But to quote Ron Anchorman, things have escalated quickly. The banking turmoil, triggered by the collapse of SVB in the US before spreading to Europe, most notably rocking Credit Suisse (SGX: CSGN). 

This has completely flipped the market’s expectations surrounding the quantitative tightening cycle. Just two weeks ago, the market priced the chance of higher rates by July at 78%. Today, there is a 70% chance of cuts by 1.5% or greater, and a 100% chance of cuts in some capacity. 

The comparison between the various forecasts can be seen on the below chart:

Gold price breaks $2,000 

The curtailment of the quantitive easing cycle and a return to the promised land of rate cuts has sent risk assets north.

Three months ago, I looked at what a dovish flip could do for gold in 2023. We are starting t to see the answer, investors scooping up the metal as the chances of an inflationary environment in future (or, a higher one than it is currently) expand with the increased probability of rate cuts. 

It is the first time the shiny metal has broken the $2,000 since February 2022. Before that, it hit the mark in July 2020 – the former when Russia invaded Ukraine, and the latter amid the first wave of COVID lockdowns. 

But that is not the only thing pushing it upward. There is also the fact that in times of uncertainty, investors run to safe haven assets. That has always been golds calling card, and while its price action has not mirrored these periods exactly – see the below chart -in general the metal has acted as a good hedge. 

And perhaps there is no greater threat to stability than what weakness in the banking sector would entail. We have seen that in abundance these past couple of weeks, and gold has taken its chance and run with it. 

What happens next for the gold price?

Going forward, it’s hard to say what will happen gold. Personally, I continue to hold part of it as a hedge in my portfolio, despite its recent correlation with equities in particular. 

Over the long-term, gold has lagged risk assets badly, particularly in the last decade. However, if you are looking for return, the boomer asset that is gold is not for you. This is a risk diversification play and a way to allocate a portion of your portfolio to something which is (relatively) uncorrelated. 

The current environment, with increased rate cuts coming down the line, still-high inflation and a banking sector fast turning into a circus, presents as an intriguing set-up for gold. It’s a kind reminder of why investors have held it, even if it requires sacrificing some return. 

Gold is one of the oldest investment assets in the world for a reason. And its boring – exactly how it should be. Investors have run towards that boring narrative this past couple of weeks, and that may continue going forward.