Gold Prices Will Hold Around $1,800, But Shoot Off If A Recession Hits In 2023 – Stanley Mill On State Street
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(Kitco News) – Gold prices fell below $1,800 an ounce after Federal Reserve Chairman Jerome Powell indicated that the US central bank is expected to keep interest rates significantly higher through 2023.
However, one market strategist said that higher interest rates would be less of a headwind for gold as the US dollar benefits less from a hawkish Fed. In an interview with Kitco News, George Melling-Stanley, chief gold strategist at State Street Global Advisors, said growing recession fears were starting to outweigh the US central bank’s aggressive monetary policy stance.
The comments come a day after the Fed indicated it was nowhere near done raising interest rates. In its updated economic outlook, the Fed sees interest rates peaking at 5.1% in 2023.
Powell said during his press conference that the central bank does not expect to cut interest rates anytime in the next year.
“Powell was absolutely clear that rates are going to go up in 2023. We’re still in a dangerously high inflationary environment,” Melling-Stanley said.
However, Melling Stanley said the Fed’s outlook and stance could change quickly as the world heads further into recession. Melling Stanley said he expects the Fed to continue raising rates through the first half of the year, but will have to cut rates by the end of the year or early 2024.
“I think in the first half of the year, gold will be in a wait-and-see mode and that will moderate demand. I do see opportunities as it heads above $1,800 an ounce,” he said. “The world is waiting for signs to see what kind of recession we’re going to have. Unfortunately, they’re going to have to wait a little bit longer.”
The Federal Reserve ended 2022 on Wednesday with a 50 basis point hike, pushing interest rates to 4.5%, marking the fastest pace of interest rate hikes in more than 40 years. Melling Stanley noted that the US economy has not yet felt the full impact of those price hikes.
“I don’t think there is any way the US economy will avoid slowing growth in 2023 and that will affect US monetary policy,” he said. “If we hit a recession, gold will take off.”
Melling Stanley explained that in the last seven global recessions, gold prices have seen an average return of 20%.
Besides slowing economic activity, Melling Stanley said inflation remains a major threat. Earlier this week, the US Labor Department said its Consumer Price Index rose 7.1%, falling more than expected. However, Melling Stanley noted that inflation remains well above the central bank’s target of 2%.
“The risk of inflation is not over yet,” he said. “I don’t think we’ve seen a peak in wages or in service costs.” “Six months ago, an inflation reading of 7% would have been a terrifying number.”
While Milling-Stanley expects relatively stable prices for gold during the first half of the year, the State Street Company’s official forecast says there is a 60% chance of gold trading in a fairly wide range between $1,600 and $1,900 an ounce in the new year.
Given the base case, State Street sees a 20% chance of gold prices falling to $1,500 an ounce if the Fed can control inflation and avoid a recession.
At the same time, he sees a 20% chance that gold prices will return to $2,000 an ounce.
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