Each month, In Gold We Trust (IGWT) provides an update on gold and the outlook for its price. The June 2023 report shows that the prospects for gold remain positive. In this article, we discuss what the report says and what to expect for the gold price in the coming period.
 

Gold as a Safe Haven

The price of gold rose significantly over the past year. Among other factors, turmoil within the banking sector had a positive impact on the price of gold. Gold is seen as a safe investment in economically uncertain times, which is why many investors turned to it. This was also evident in the gold price when banks began to waver, reaching a record level of over EUR 61,000 per kilogram.
 

Central Banks Increase Gold Reserves

Many central banks around the world continue to increase their gold reserves, especially those of emerging economies. Central banks appear to be preparing for increasing geopolitical tensions. Additionally, the war in Ukraine also plays a role in the price of gold. According to the IGWT report, the world seems to be splitting into two different power blocs: on one side, the Western G7 countries, and on the other, a (growing) group of BRICS countries. The IGWT report also suggests that the end of the dollar's hegemony is near.
 

Gold Returns in Various Currencies

As mentioned earlier, gold is known as a safe haven. Normally, gold would be expected to perform well due to high inflation and geopolitical turmoil, but it underperformed last year due to the aggressive interest rate policy of the U.S. Federal Reserve (the Fed). Interest rates in the United States rose quickly, making the dollar very attractive. In 2022, the dollar had a strong year compared to the euro, as Europe was late in raising interest rates. The first rate hike didn't come until July 2022, while the Fed took this decision as early as March. Therefore, the development of the gold price in dollars was largely determined by the strength of the dollar.
 

Gold Price in USD and EUR from 06/2021 to 05/2023
 
The table below, taken from the IGWT report, shows the returns of the gold price in different currencies from 2000 to 2023. It can be seen that the gold price does not experience spectacular price increases every year. In 2013, for example, the gold price fell in all currencies. However, the average return over this period across all currencies is +10.7%, which is why gold is considered a good hedge against inflation. The purchasing power of a banknote decreases annually due to inflation, so it is not that the price of gold performs well each year, but rather that fiat money loses purchasing power every year.
 

Gold Performance in Various Currencies from 2000 to 2023
 

Interest Rate Changes and Inflation

According to the IGWT report, geopolitical turmoil is far from over, which is why many investors still find gold attractive as a safe haven. The Fed announced on Wednesday that it will not raise interest rates, marking a pause in a series of ten consecutive rate hikes since March last year to curb inflation. During the previous rate decision in May, the interest rate was raised by a quarter percent to a range of 5–5.25%, the highest level in sixteen years for the United States.
 
Inflation in the United States has been declining for some time. In April, price increases were at 4.9%, compared to 9.1% in June 2022. The United States hopes to avoid a recession by not raising rates further.
 
The European Central Bank (ECB) also made an interest rate decision today. It was expected that the ECB would raise rates, as inflation in Europe remains high. For example, consumer goods and services in the Netherlands were 6.1% more expensive in May compared to the same month a year earlier, according to CBS. In April, inflation was 5.2%. Last month, ABN AMRO wrote that it still expects high inflation in 2024. Rabobank also mentioned on Thursday that the Dutch economy is cooling only slightly and is still overheated. Finally, Klaas Knot, president of De Nederlandsche Bank, stated that inflation is likely to return to normal levels only in 2025 and that more rate hikes are needed to contain inflation.
 
Ultimately, the ECB announced that interest rates would be raised by another quarter point to 3.5%, the highest level in over twenty years. Christine Lagarde also made it clear that this is not the end of an unprecedented series of rate hikes aimed at bringing inflation back to 2% "price stability" in the medium term. However, there are doubts about the effectiveness of these rate hikes, as price increases are driven by supply-side issues, including high energy prices and rising labor costs this year. Meanwhile, rate changes affect the demand side of products.
 

The Gold Price

The real interest rate is particularly important for the price of gold. This is the interest rate adjusted for inflation. In recent years, this rate has been negative, making gold attractive as an investment. Gold is also seen as a good inflation hedge, and if inflation remains high, it could positively impact the price of gold.
 
Additionally, a recession could also mean a price increase for gold. Historically, gold performs well during economic recessions. For example, the gold price rose by 81.6% between 1973 and 1975, when the U.S. economy experienced a 16-month recession. The S&P 500 index, which tracks the stocks of 500 U.S. large-cap companies, lost more than 20% of its value during that time. In 1980, a six-month recession led to a 27.6% increase in the gold price. Lastly, the S&P 500 index lost 25% during the most recent economic recession from 2007 to 2009, while the gold price rose by 25% during that period.
 
Although the price of gold depends on various factors, the outlook remains positive. The Silver Mountain offers you physical gold and silver at the best prices in the Netherlands. Additionally, we offer a unique buyback guarantee, meaning that you can easily sell your precious metals back to us at any time, based on fixed formulas in relation to the then-current gold and silver prices. We always buy back, regardless of the volume you wish to sell and regardless of the price of gold or silver.
 
Disclaimer: The Silver Mountain does not provide investment advice, and this article should not be considered as such. Past performance does not guarantee future results.