‘Tables turning’ in global currency markets may lead to further gains for gold

Source: Heraeus Precious Appraisal

Precious metals prices rose in the final weeks of 2022 as the dollar began
to weaken. Despite a boost from the heightened geopolitical uncertainty in
Q1’22 and higher inflation than for several decades, by the end of 2022
the gold price in dollar terms finished near to where it began last January
($1,810/oz vs. $1,825/oz). In Europe, the euro gold price gained 6% on
the year owing to a 6% depreciation of the EURUSD pair.
Monetary policy divergence could lead to further dollar depreciation. With
inflation still high, the ECB President vowed in December to raise interest
rates by 50 bp in February, with a further 50 bp possibly coming hot on its
heels in March. This would add to the 250 bp cumulative hikes since July.
Some forecasts predict the ECB could take the Bloc’s deposit facility to
3.5% (currently 2.0%) by H2’23, implying a total of 150 bp in additional
hikes this year. Taking the Fed’s December median (dot plot) projection of
5.25% for the Federal Funds Rate by the end of 2023, further implied hikes
in the US amount to 75 bp. The potential variance in monetary policies by
the second half of the year could lead to the dollar weakening further.

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