The Fed's shift will be beneficial to gold in 2023

Gold prices will rise in 2023 due to the Fed's policy shift.

As a result of the Fed's change in policy, gold prices are likely to go up in 2023.

Again, it's a work Friday. Stock bulls were hoping for a nonfarm payroll report that was cool enough to support the idea that the Federal Reserve would be less aggressive.

Still, Fed chair Jay Powell's announcement this week that the central bank will slow the pace of rate hikes helped push the S&P 500 SPX, -0.57% back above 4,000. For those who are more interested in technical analysis, it is important to note that the benchmark is above its 200-day moving average.

The recent drops in bond yields and the dollar, which are linked to what people think the Fed will do, helped the S&P 500 rise 14% from its low point in mid-October. The dollar index DXY, +0.43%, has fallen below its 200-day moving average, and the 10-year Treasury yield TMUBMUSD10Y, 3.599%, is close to breaking through the bottom of an uptrend channel that has been in place for a year.

But this change in the value of the dollar and bonds is also good for gold, down 0.94%.

The price of the yellow metal went back up to $1,800 an ounce on Thursday, as measured by the COMEX front-month futures contract. It went up by 3.1%. That was the biggest daily increase since April 2020, and it made bullion more expensive than it had been since August.

Francisco Blanch is in charge of the commodity strategy team at Bank of America. They think gold has farther to go. In a recent report on the future of commodities through 2023, BofA said that the price could go above $2,000 an ounce next year because, of all the precious metals, "gold has the most to gain if the Fed turns."

BofA says that gold has always been driven by investor demand because it has few uses in business. And the price of borrowing money and the dollar, which is what gold is priced in, tend to have an effect on how much people want to buy gold.

So, "a turn away from the aggressive rate hikes through 2023 should bring new buyers back into the market."

And some buyers with a lot of money have shown their hands. BofA says that central bank purchases picked up again in 2022, with Turkey, Egypt, Iraq, India, and Ireland all adding to their holdings.

The most recent survey by the World Gold Council shows that this trend is unlikely to change, as 25% of central banks plan to invest more in precious metals, up from 21% last year.

But central banks only make up about 20% of what BoFA calls the "total implied investment" in gold. Because of this, their interest is not enough to really start a rally. For this to happen, "bar hoarding, physically-backed ETFs, OTC net-investment, and official sector purchases" need to increase their demand for gold.

"Annualized gold purchases so far this year put the gold market right between $1,500 and $2,000 per ounce. BofA says, "It's encouraging that for gold to fall to the lower end of the range, recent investor liquidations and outflows from ETFs would have to speed up, which is not our base case because we expect the USD to bottom out and 10-year rates to go up less."

"It's very likely that the U.S. central bank will keep raising interest rates, but the rate of rate hikes should start to slow down." This change of direction is likely to attract new investors. "Because of this and because physical demand is already high in some places, we think gold prices will go up in 2H23," BofA says.

Lastly, here's one more thing that BofA doesn't talk about. Some market watchers think that one reason gold hasn't gone up as much as expected in recent years is that a large number of potential investors have been drawn to cryptocurrencies instead. As worry about cryptoassets grows, could some of these players now be interested in bullion?