Need to Know: The Fed pivot will be good for gold in 2023, says Bank of America

by | Dec 2, 2022 | Stock Market

It’s jobs Friday again. Equity bulls were hoping for a nonfarm payrolls report that is sufficiently cool that it allows for the narrative of a less aggressive Federal Reserve to be sustained. They didn’t get it. Still, confirmation from Fed chair Jay Powell this week that the central bank will slow its pace of rate hikes has helped push the S&P 500
SPX,
-0.09%
firmly back above 4,000, and crucially for those of a more technical bent, the benchmark sits north of its 200-day moving average.

Underpinning the S&P 500’s 14% bounce from its mid-October trough are the recent retreats in bond yields and the dollar, moves that are evidently linked to Fed expectations. The dollar index
DXY,
+0.64%
has broken below its 200-day moving average, while the 10-year Treasury yield
TMUBMUSD10Y,
3.599%
is threatening to fall through the floor of a year-long uptrend channel. But this shift in the buck and bonds is also good for another asset: gold
GC00,
-0.93%.
The yellow metal on Thursday, as measured by the COMEX front month futures contract, jumped 3.1% to recover the $1,800 an ounce level. That was the biggest daily gain since April 2020 and took bullion to its most expensive since August.

The commodity strategy team at Bank of America, led by Francisco Blanch, thinks gold has further to go. In a comprehensive 2023 commodity outlook note recently released, BofA says the price could exceed $2,000 an ounce next year as of all the precious metals “gold has the most to gain…on a Fed pivot”. “With relatively limited commercial uses, gold has always been driven by investor demand,” says BofA. And that demand in turn tends to be impacted by borrowing costs and the dollar, in which gold is denominated. Thus: “A pivot away from the aggressive rate hikes through 2023 should bring new buyers back into the market.” And some weighty buyers have been showing their hand. Central bank purchases have rebounded in 2022, with monetary authorities in Turkey, Egypt, Iraq, India and Ireland all adding to their holdings, BofA observes. The latest survey by the World Gold Council suggests this trend is unlikely to change, with 25% of central banks expecting to increase their exposure to the precious metals further, compared with 21% last year.

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