According to experts, bullish sentiment on gold comes from weakening greenback and elevated gold demand at central banks
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The dollar will weaken and the King of Metals will grow stronger, predict analysts of the gold investment giant Sprott . They emphasize the growing interest in the bullion on the part of central banks and indicate a great investment opportunity in the shares of gold companies.
Since the beginning of November, a beautiful price rally on gold has been going on. From USD 1,620 per ounce, the bullion has already reached the level of USD 1,874 per ounce, the highest in 10 months. An increase of 16% in 2 months is something that has not been on gold for a long time.
Experts agree that the return of good sentiment to gold is the result of the weakening US dollar and increased demand for the metal from central banks. And there are more and more expert voices convincing that this is just the beginning of the return of the King of Metals to form, and with it the value of the so-called. gold companies.
Gold prices - 12 months
Source: TradingView
In 2023, capital will start flowing towards gold
Sprott 's report was published, considered one of the most important reports on the gold market (alongside the Incrementum reports). John Hathaway, CFA and managing partner at Sprott, argues that precious metals are undervalued and undervalued and remain out of the reach of investors, despite good relative and absolute returns in 2022.
“Most gold and silver mining stocks delivered decent, but not convincing, relative performance last year. However, investors should be aware that mining stocks are traded as long-dated options to higher gold and silver prices. For this reason, they provide investment leverage against medium to long-term directional movements in metal prices.
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According to Hathaway, there will be a positive change in cash flow in 2023 and capital will start flowing towards precious metals. This change will be driven by a deeper and longer recession than expected, and a further decline in the value of the US dollar as well as a continued bear market in financial assets. In addition, the secular weakness of the US dollar may be supported by long-term structural changes in global currency and trade arrangements due to geopolitical considerations and the possible modernization of gold trading.
According to an expert from Sprott, only a few investors are fully aware of the advantages of gold exposure. “The real deal, however, lies in inexpensive, currently unpopular mining stocks . They have the potential for great value growth. In our view, gold equities generally hit a generational low in Q4 2022,” says Hathaway.
Quotations VanEck Gold Miners ETF on against the backdrop of the S&P500 – 5 years
Source: TradingView
Central banks exchange bonds for gold
The Sprott report reminds us that in 2022 gold was an effective asset hedge. Overall, the price of gold was flat while the S&P 500 fell -18% . The gold stock index fell by -8.14%, but it still means that it was 10 pp lower than in the previous quarter. better than the index of the 500 largest American companies.
Sprott analysts point out, gold has almost always performed very well in bear markets. On average, compared to the S&P500, it earned 44 pp. more, considering all the bear markets in the market since 1929.
“Despite the nonsensical strength of the US dollar and rising interest rates, gold emerged from 2022 as the macroeconomic winner in relative and absolute terms. It turned out to be a safe haven, which surprised analysts, including those at Credit Suisse and JP Morgan, who had forecast year-end prices of $1,500 and $1,520 respectively.
According to an analyst from Sprott, one of the most interesting facts in 2022 is that central banks sold bonds for about USD 424 billion , and these are data only for the first 9 months of last year. If we compare this with the fact that in the third quarter of 2022 they bought a record amount of gold, almost exactly 400 tons, it gets really interesting.
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Gold purchases by central banks (tonnes, quarterly)
Source: Sprott
“Trading in gold is hampered by an archaic, even medieval market structure that has reduced the usefulness of the metal as collateral similar to US Treasuries. Please note that under the Basel III banking agreement, gold is not considered a high-quality liquid asset that can be used to assess an institution's financial strength. From 2018, FMSB (Financial Markets Standards Board), chairs a working group on precious metals that includes the World Gold Council (WGC), the London Bullion Market Association (LBMA), global banks and financial markets associations. The aim of the working group was to identify potential improvements to the global gold market, focusing on a robust market infrastructure, increased data transparency and post-trade efficiency. […] A successful modernization of the structure of the gold market could elevate gold to a widely used reserve asset with a transaction utility similar to that of liquid national currencies and other safe-haven assets such as government bonds. […] This would be a great success for gold, which would reduce investors' reliance on paper currencies and thus potentially lead to a permanent increase in the price of gold,” Hathaway argues.
