Gold is a 2023 story, but these are the currencies to buy it right now

(Kitco News) Gold is down 8% year-to-date, and there may not be enough momentum to reverse the trend this year. But that’s only the case for gold, which is priced in US dollars, according to Pepperstone’s director of research, Chris Weston. Here are the currencies that should be on your radar.

There has been a big debate about gold as an inflation hedge, especially after it retreated from the $2,000 per ounce level posted in March. But the disappointing price action doesn’t mean gold has failed, Weston told Kitco News. These are inflation expectations for gold, which have been low as CPI numbers hit 40-year highs.

“Gold is a hedge against expected inflation rather than realized inflation,” Weston said Tuesday. “Gold has held up pretty well against real rates. People are looking at the wrong kind of inflation. It’s more about inflation expectations and breakeven rates. If you look at breakeven rates over five years, they peaked at around 3.76% in March and then fell back to 2.43%.

Using this correlation between gold and breakeven rates, Weston sees the fair value of gold below $1,600 an ounce. At the time of writing, December Comex gold futures were trading at $1,679.70, down 0.37% on the day.

Little is expected to change before next year in the USD gold price, with Weston waiting for a spike in the US dollar to usher in higher gold prices.

“Gold is a 2023 story. I see signs that the dollar will be underperforming in 2023,” Weston said. “Next year we will see a weaker dollar which could pave the way for a slight reversal in real rates. This is where we would view gold quite favorably.”

The first thing to watch next year is the Fed’s terminal rate. At the September meeting, Fed officials said they see the federal funds rate climbing to 4.6% next year after hitting 4.4% at the end of 2022.

The US central bank has raised rates by 300 basis points this year, bringing the current range between 3% and 3.25%.

“In theory, we’d like to see that terminal rate come down. If you look at the full year for next year, we have about 24 basis points of cuts,” Weston noted. “Yet the Fed has made it clear that it will not cut rates next year.”

The idea that we might see rate cuts next year would force the greenback down and gold up.

“If the market accepted the idea that we were getting a disinflationary shock and that we had to incorporate a bigger element of rate cuts in the second half of next year, that would be the trigger for a very extended dollar market to start. to reduce some of these positions. We could see a rally in risk in equities through the end of the year, and gold would follow this trend.”

What is the best currency to buy gold?

About 90% of people trade gold in US dollars, but if investors want to become more specialized, they should consider buying gold in the weaker currency and selling it short in the stronger currency. strong, according to Weston.

This is one of the reasons why gold has underperformed in US dollars against some of the other currencies. “If you get it right, you can maximize the currency effect on the back of that,” Weston said.

Gold in the Australian dollar is up 6.6% over the past 30 days and 1.24% over the past six months. The price of gold in sterling has risen 2.3% over the past 30 days and has been flat for the previous six months. By comparison, in US dollars, gold is down nearly 3% in the past 30 days and 15% in the past six months.

“It’s the currency effect there,” Weston described. “Australian dollar gold has performed incredibly well since September 16th. a good move since July and has increased. We are only pushing £1,531 at the moment, and that needs to break to maintain momentum.

Equity risk remains elevated, exposing these currencies to further downside risk. “We still see the Australian dollar at risk of hitting 60 cents. The pound also faces greater downside risks after the Bank of England abandoned its temporary monetary support mechanism,” he added. .

Meanwhile, the US dollar remains an over-loved currency, providing an opportunity to short gold.

“If I wanted to trade gold on the upside, I would look at what we perceive to be the weakest currencies, and that continues to be the Aussie, Kiwi and Pound,” Weston pointed out.

Weston isn’t so sure about gold in the Japanese yen, although that has been the focus this year, as the yen has acted as a bond indicator.

“The yen has been the big underperformer. But we’re on intervention watch, which just keeps me a little on top of the Japanese yen gold trade. If we were to see the Bank of Japan make some noise to step in again, then gold in terms of the Japanese yen would probably work just fine as well,” he noted.

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.


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