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Bank of America predicts gold will benefit from the Fed pivot in 2023

In order for the narrative of a less aggressive Fed to be sustained, equity bulls hope that the nonfarm payroll report will be sufficiently cool. They didn’t understand.

However, Fed Chair Jay Powell’s announcement this week that rate hikes would slow has helped lift the S&P 500 SPX back above 4,000, and crucially for those with a more technical bent, the benchmark now sits north of its 200-day moving average.

Bond yields and the dollar have declined in recent weeks, moves that are clearly linked to Fed expectations, underpinning the S&P 500’s 14% bounce from its mid-October trough. BX:TMUBMUSD10Y threatens to fall through the floor of an uptrend channel formed by the dollar index DXY and the 10-year Treasury yield BX:TMUBMUSD10Y.

Gold GC00 is also benefiting from this shift in the buck and bonds.

In the COMEX front month futures contract, yellow metal rose 3.1% to $1,800 an ounce on Thursday. The price of bullion reached its highest since August after that big gain since April 2020.

Francisco Blanch, the commodity strategist at Bank of America, believes gold can go much higher. Among all precious metals, gold could see its price exceed $2,000 an ounce next year, according to BofA’s comprehensive 2023 commodity outlook note.

According to BofA, investors have always driven gold due to its limited commercial uses. The dollar, in which gold is denominated, and borrowing costs tend to impact that demand.

It is anticipated that new buyers will return to the market if rate hikes are scaled back through 2023.

There have been some weighty buyers showing their hands as well. Bank of America reports that central bank purchases have rebounded in 2022, with Turkey, Egypt, Iraq, India and Ireland all adding to their holdings.

According to a World Gold Council survey released last week, 25% of central banks anticipate further increasing their exposure to precious metals, up from 21% last year.

The central banks, however, do not make up more than 20% of the “total implied investment” in gold, which does not encourage an uptick in prices. It will be necessary to increase demand for “bar hoarding, physical ETFs, OTC net-investment, and official sector purchases” in order to achieve this goal.

The gold market is now trading between $2,000/oz and $1,500/oz based on annualized gold purchases year-to-date. BofA adds, “We expect a bottoming out in USD and less upside to 10-year rates for gold to fall to the lower end of the range, which is not our base case.

In all likelihood, the U.S. central bank will continue tightening monetary policy, but it is likely that rate hikes will slow down. New investors are likely to enter the market as a result of this pivot. The Bank of America believes gold prices should rally into 2H23 due to strong physical demand in some pockets.

“Last but not least, BofA overlooks another factor. It has been speculated by some market observers that one reason gold hasn’t rallied as much as expected is that a significant cohort of potential investors are attracted to crypto instead. Is bullion now attracting some of those players as a result of the growing anxiety over crypto assets?

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Markets

After stronger-than-expected jobs data, the Fed might have a harder time slowing rate rises, as S&P 500 futures ES00 sank 1.4% 40 4021. As of 105.44, DXY had gained 0.7% and BX:TMUBMUSD10Y had climbed 11 basis points to 3.620%.

The buzz

The monthly nonfarm payrolls report was the big data point on Friday. Temperatures were higher than expected. There were a net 263,000 job additions in November, notably more than the 200,000 economists predicted. A month-over-month wage inflation rate of 0.6% exceeded expectations.

Chairman Axel Lehmann said outflows from Credit Suisse CH:CSGN have “basically stopped ”.

In response to news that Blackstone is limiting redemptions from its $69 billion Real Estate Income Trust fund, Blackstone stock BX is down 1% today, after falling 7% on Thursday.

Ahead of the OPEC+ meeting this weekend, U.S. crude futures CL gained 0.8% to $81.86 a barrel. There are concerns that a slowing global economy will crimp oil demand as oil prices sit just several bucks above 11-month lows hit last week. In the meantime, the EU is attempting to agree on a price cap for Russian oil.

Following the closing bell on Thursday, Marvel Technology MRVL shares fell 7% in premarket trading following disappointing earnings and outlooks.

A disappointing earnings guidance was delivered by cybersecurity company Zscaler ZS after the close, leaving the stock down nearly 10%.

The chart

Speaking can be a lucrative business for business people, celebrities, and politicians. During his two speeches in Japan in 1989, former U.S. president Ronald Reagan received $2 million. The question is, how much are these conversations actually worth, and what’s the best bang for your buck?

Benedek Vörös is a contender in the Index Investment Strategy department at S&P Global. When the Federal Reserve meets next week, Federal Reserve Chair Jay Powell will essentially confirm that interest rate hikes will be slowed.