As measured by the SPDR Gold Shares ETF (GLD ), the largest bullion-backed exchange traded fund, gold is off to a strong start in 2023. GLD is higher by 5.79% as of January 26.
That’s after gold disappointed a bit last year, declining despite soaring inflation, though the yellow metal did outperform broader equity and fixed income benchmarks. However, some market observers pointed out that inflation could prove to be longer-lasting than expected due to shifts in the labor force. That could force the Federal Reserve’s hand to raise interest rates, which is a drag on gold.
“Evidently, inflation has peaked. But when you talk to the smartest economists out there, what they’re really looking at is specifically core inflation in the service sector, which tends to be supported by wages,” noted Daniel Ghali, a senior commodity strategist at TD Securities. "And what’s different this cycle is that we have a ton of baby boomers that are retiring early. And that’s keeping the labor market structurally tight, which should keep service sector inflation sticky, and in turn, will be a constraint on the Fed to cut rates. That’s really the bearish macro driver for gold.”
Ghali went on to note that data indicate that professional traders aren’t rushing to get into gold, begging the question of who’s currently buying large enough quantities of bullion to move the price higher. The answer could be global central banks and Chinese and Indian investors, among others.
“So that begs the question, who exactly is buying? And I think there’s a lot of evidence of substantial purchases from Chinese participants, both central bank and non-central bank official sectors, who are buying gold at a massive scale. And that’s really the primary reason why gold prices have rallied in the New Year,” added the strategist.
In the U.S., ETF investors are displaying enthusiasm for gold, albeit in modest fashion, as three of the largest gold ETFs, including GLD, have taken in almost $700 million in new assets since the start of the year.
Those are positive signs, and while it’s possible that gold jumps to $2,000 per troy ounce later in 2023, it’s also possible that a retreat arrives first.
“I mean, it’s obviously possible that we’re going to break $2,000 at some point this year. But I would argue that the rally we’ve seen is probably not what’s going to lead to that breakout. And instead, we’re more likely to see a pullback in gold,” concluded Ghali.
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