Days ago, the World Gold Council released their latest Gold Market Commentary. Here, we distill their analysis to a few important takeaways that can help investors understand what has happened with gold and where it might be headed.

Wham, Bam, Thank You GRAM

The World Gold Council’s Gold Return Attribution Model (GRAM) is a function used to quantify how the various drivers of gold’s performance contribute to monthly price changes. The model also assesses how the influence of these drivers change over time. GRAM was helpful in understanding the cause of gold’s 3% gain in December of 2022 which helped the metal end the year on a positive – albeit slightly – gain. The data within GRAM suggests that this positive return was largely due to a weaker US dollar.

Retail and Central Bank Demand Lifted Gold

Strong demand for gold from both retail and central banks was enough to offset weak demand seen among institutional investors. As the World Gold Council explains, “an unrivaled surge in real yields (coupled with a strong US dollar) failed to drag gold down in 2022.” This outcome is an example of why diverse sources of demand are critical to the long-term performance of gold especially in years that threaten to bring price per ounce down.

Gold Continues to Offer Low Correlation and Low Volatility

Gold’s correlation to a traditional 60/40 portfolio – while higher than average – was still low at 20. This is an important benefit of gold for most retail investors seeking to bring stability to a portfolio that continues to face the uncertainty of a looming recession and interest rate increases. Additional data showed that gold’s volatility was in line with its long-term average while the 60/40 portfolio experienced one of its most volatile years since 1972.

Gold Buyers Likely Want Protection From Inflation

Analysts at the World Gold Council concluded that the increasing gold purchases seen among retail investors was likely due to concerns about inflation. This was especially true within Emerging Markets according to their research. This segment of the market, which represents 60% of all retail investors, has fewer ways to counter rising inflation. Central bank purchases added to this purchasing activity as 673t was added to reserves by the end of Q3 which is a historic high.

2023 Could Bring a Mild Recession

The World Gold Council sees a “stable but positive outlook for gold prices.” Additionally, their analysis forecasts a weaker US dollar, pressure on equity prices, slightly higher bond yields, and continued geopolitical risk stemming from the uncertainty surrounding the war in Ukraine. Finally, the World Gold Council noted a seasonal rebound in gold demand in China at the end of 2022. Much of this buying was due to consumer activity being driven by the Chinese New Year. While this seasonal surge was low in comparison to historical figures, analysts at the World Gold Council expect it to improve as China continues to find its way out of their zero COVID policy.

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The price of gold exploded higher last week, climbing to a fresh 9-month high above $1,900 an ounce. Gold is shining once again as investors believe that a minor drop in the headline inflation rate in December will slow the pace of Federal Reserve interest rate hikes, which is already boosting demand for the precious metal.

Gold traded as high as $1,921.50 last week as investors are flocking to the precious metal following the release of the December consumer price index (CPI) report. While the overall inflation rate fell to 6.5%, many key categories continued to see double digital price gains in December.

According to the Bureau of Labor Statistics, these categories continued to rise sharply in December.

How Much More You Are Paying Now

That means you are still paying sharply higher prices for everyday goods from eggs, milk, butter, and bread to homes, rent, new cars, and even the energy to heat your home and keep you warm during the cold winter months.

Slower Fed Rate Hikes Ahead

The inflation news unleashed a fresh round of gold buying as investors expect the modest decline in the headline number from 7.1% in November to 6.5% in December, will allow the Fed to slow down its aggressive interest rate hikes – which at this point are expected to trigger a recession in the United States in 2023. Despite the 2022 rate hikes, core inflation remains well above the Fed’s 2% inflation target.

The CME Group’s FedWatch Tool now reveals that 91.2% of traders expect the Fed to hike by only 0.25% — which would reveal a massive slowdown from the 0.75% interest rate hikes seen in 2022.

Recession Ahead

The damage from the Fed’s 2022 aggressive interest will soon show in the form of a recession. There is a well-documented lag between monetary policy and its impact on the economy. Here’s what Wells Fargo Economics says: “We expect a recession to begin in the United States in the second half of the year.”

Gold Is In an Uptrend

What does this all mean for gold? You can expect even higher prices ahead, with gold possibly at $2,000 an ounce, just around the corner.

“This year the global economy is facing a serious slowdown, and in many countries a recession. That could make gold more appealing now that yields and the dollar are less of a negative factor,” Craig Erlam, senior market analyst at OANDA told CNN.

In the face of stubbornly high inflation and the potential for a recession in the U.S., investors are flocking to the safety and security of gold. Precious metals have served as a store of value for thousands of years. If you are seeking a safe haven and also an asset that will grow your wealth, consider increasing your allocation to gold and silver today before prices move sharply higher.

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Oil prices have a meaningful influence on gold prices. Understanding why means first examining how dollar-denominated assets work.

A dollar-denominated asset is any asset priced in US dollars. Gold is an example of a dollar-denominated asset as well as oil. This means that a rise in the value of the dollar is likely to drive down the price of those assets.

The rise and fall of gold and oil prices often occurs in tandem because both assets share this characteristic. However, this relationship is complicated by inflation which is often defined as too much money chasing too few goods.

An increase in oil prices contributes to a rise in inflation. This happens because a rise in oil increases the cost of inputs. This relationship has weakened somewhat in recent decades as oil has become less integral to manufacturing but the influence is still there. Moreover, the transportation of finished goods requires oil which also impacts the prices of those products.

This connection between oil and inflation matters to gold investors because gold tends to increase in value as inflation increases according to research showing that “there is a clear co-movement between the prices of the two strategic commodities, both in nominal and real terms.” This connection is so strong that even a dramatic short-term movement in oil prices reverberates throughout the gold market. The same body of research determined that “the signs of the instantaneous impact of oil price shocks on gold returns are all identically positive.”

This link makes sense. An increase in oil prices will hinder economic growth. Running a business becomes more expensive. This slowing of economic activity often flows through the equities market. As a result, investors tend to move towards “safe haven” investments like gold.

One of the most direct connections between the prices of gold and oil can be seen in mining. The resource-intensive process of mining demands oil for the operation of industrial machinery.

A rise in oil prices can force a mine to go off-line or shut down entirely. Even exploration requires substantial oil resources. This relationship is present within other mined resources. For example, Barron’s explains “the correlation between the daily iron ore price and oil price has been 72%.”

Other academic research supports this link. One study found that “oil is one of the main factors in causing variations in stock prices, exchange rate and gold prices.” Countries experiencing the strongest economic growth are often the largest drivers of immediate surges in oil demand. Consequently, it is plausible that emerging economies have a disproportionately large influence on gold prices in the short-term.

All of this leads to one question for gold investors: where is oil likely to go in 2023?

Today, West Texas Intermediate oil is trading at approximately $80/barrel. Analysts at JPMorgan forecast this to rise to $90 in 2023. Bank of America projects an average of $94/barrel in 2023.

Many of these forecasts are influenced by the uncertainty surrounding the war in Ukraine.

The key takeaway for gold investors is this: there are many factors influencing the price of gold and oil is among the most consequential. A rise in oil prices in 2023 – a likely scenario – should bode well for gold.

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Consumer inflation rose 7.1%, down from a summer peak of around 9% this year, according to the November consumer price index report. Yet, once you dig into the data, the cost of many things you buy are still rising – like groceries, dining out, recreation services and haircuts and other personal care services.

In 2022, inflation is not just an American problem – it’s a global problem. Heading into 2023, it’s unlikely this stubborn rising price problem will go away anytime soon.

There is double-digit price inflation in almost half the world right now, with some countries even experiencing triple-digit inflation. Here’s a look at the top 10 eye-popping inflation rates around the world right now.

Source: TradingEconomics

This type of inflation is debilitating. While we hope the United States will never experience hyperinflation like the type that is hitting Venezuela, hope is not a plan. Here is a suggestion from a recent article: “How to prepare yourself for hyperinflation: tips from the Venezuelan experience.”

“Purchase a more stable currency: If the money in your bank account starts to lose purchasing power, buying another currency in which you can accumulate good savings is a must. I also recommend buying commodities like gold, but be careful where and how you store it. Purchasing real estate is not recommended since properties can lose their value quickly when distrust in the local economy collapses and people start fleeing.”

While gold is a precious metal, it is also a currency. In fact, it is a universal currency that is accepted in every country in the world today. There’s never been a better time to consider shifting some of your dollars into a more reliable currency like gold.

High inflation is not limited to emerging markets and developing nations – many developed nations are shouldering high levels of inflation in 2022. Take a look at the list below.

Source: TradingEconomics

Inflation Isn’t Going Away Soon

While the Federal Reserve embarked on a campaign to slow the economy and bring down inflation with sharply higher interest rates in 2022, once inflation is ingrained in an economy, or in this case the global economy, it doesn’t just disappear quickly.

Here’s what Time magazine said last month: “Economists and financial experts agree on one thing: Higher prices will likely last well into next year, if not longer. And that means Americans will continue to feel the pain of higher prices for the foreseeable future.”

How You Can Deal With Ongoing Inflation

As a consumer, it’s hard to avoid higher prices at the grocery store and restaurants – after all, we all need to eat. Many Americans are making choices however and choosing to cook at home more, eat out less and even cut back on expensive cuts of meats or eggs – which have suddenly rocketed higher in price.

Most Americans today aren’t used to shortages or sharply higher prices. We haven’t lived through an inflation crisis in 40 years. During this time, it’s important to maintain a cash reserves account – some experts recommend anywhere from 6 months to 2 years of living expenses, depending on your age and the reliability of your income. That sounds like a lot, but with a recession potentially around the corner in 2023, maintaining a healthy emergency fund could be your saving grace.

Use Gold as Your Emergency Fund

Holding your dollars in a bank account means they simply become worth less every day they sit there. Investors can consider holding their emergency fund in gold. If you need to tap your emergency fund for any reason, you can liquidate or sell your gold for dollars instantly – the same day.

Second, keep investing. In inflationary times, more than ever, it is important to keep investing – in order to prevent your purchasing power from eroding. Physical gold is up 9% since early November, with predictions it could climb as high as $3,000 in 2023.

Gold is one of the most liquid markets in the world, a reliable place to store, protect and grow your wealth. Inflation is here to stay for the foreseeable future and if you haven’t already, consider making an increased investment in gold today to protect and grow your financial future.

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