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Gold Market Set to Surge in 2023 as Recession Looms

By:
Muhammad Umair
Published: Apr 17, 2023, 13:35 UTC

As a recession looms due to the negative treasury yield curve, moderating inflation, and strong job market, the gold market stands to benefit, with technical evaluations pointing to a bullish outlook in 2023.

Golden Coins and Bars, FXempire

In this article:

Key Points

  • A slowdown in inflation, a robust job market, and a negative treasury yield curve indicates recession.
  • The appearance of inside bars in 2021 and 2022 signals price compression, with a break above $2,075 signifying strong bullish outlook.
  • Gold prices currently trade within a bullish phase, poised for a potential breakout.

The recent collapse of Silicon Valley Bank has raised concerns within the banking sector, underlining the vulnerabilities of interconnected financial institutions and revealing the extensive effects of bank contagion. As depositors rush to withdraw funds, resulting in a bank run, other banks face the challenge of reassuring customers and preserving stability.

This article explores the consequences of Silicon Valley Bank’s failure, assessing its influence on the regional banking industry, the wider economy, and the gold market. The analysis covers the ramifications of the present economic climate, which features a negative treasury yield curve, moderating inflation, and a robust labour market, along with technical evaluations suggesting a positive outlook for gold in 2023.

The prospect of a recession is on the horizon and understanding these elements is essential for investors seeking to navigate the uncertain environment and protect their assets.

The Ripple Effect of Bank Contagion

A surge of depositors withdrawing their funds has led to a bank run, placing pressure on other banks to reassure their clientele. As depicted in the chart below, the pace of deposit withdrawals has accelerated significantly, with some projections indicating that the total value of withdrawals was huge.

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This decrease in the regional banking index is likely stems from heightened uncertainty and risk aversion among investors, who may be apprehensive about the broader consequences of the bank’s failure. Consequently, numerous investors are turning to safe-haven assets like gold, commonly viewed as a value store during economically uncertain times. Therefore, the decline in the regional banking index may positively affect gold prices, with rising demand for the precious metal driving up its value.

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Current Economic Outlook

Inflationary Slowdown

The recent easing of inflation after hitting a 40-year record high, as indicated by the CPI data, may have a positive impact on the gold market.

Inflation has been a major concern for investors and policymakers alike in recent months, as rising prices erode the purchasing power of consumers and can lead to economic instability. The high inflation rate has already led to an increase in interest rates, which can damage the economy by reducing borrowing and spending.

However, as inflation eases, there may be less pressure on central banks to raise interest rates, which is positive for the gold market. Lower interest rates lead to increased demand for gold as investors seek to find alternative stores of value, particularly in a low-yield environment.

Additionally, a more stable economic environment with lower inflation and interest rates lead to increased consumer confidence and spending, which can benefit companies and ultimately drive-up demand for gold. Therefore, the easing of inflation after hitting record highs have positive implications for the gold market.

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Strength in Labour Market

The positive jobs growth in March 2023, which added 236,000 jobs, have a positive impact on the gold market. As jobs growth remains bullish, it indicates a stronger economy and increased consumer spending, which lead to greater demand for goods and services, including gold.

A robust job market also led to increased confidence among investors, which drive up demand for safe-haven assets like gold. Furthermore, a strong jobs report decreases the likelihood of further economic stimulus measures, which lead to inflationary pressures that are often positive for gold prices. Therefore, the positive jobs growth in March 2023 signal positive implications for the gold market.

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While a negative Treasury yield curve, easing inflation, and a strong labour market may be indicative of an impending recession, the potential for such an event have a positive impact on the gold market. During times of economic uncertainty, investors turn to safe-haven assets like gold as a store of value and a hedge against market volatility.

As the possibility of a recession looms, investors seek to protect their portfolios by increasing their exposure to gold. Additionally, a potential recession may lead to increased government spending and stimulus measures, which can lead to inflationary pressures and ultimately drive-up demand for gold.

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Technical Evaluation is Bullish

Why 2023 is Bullish?

The chart below illustrates annual candlesticks, with each candle representing a one-year time frame. A notable observation is the appearance of inside yearly candles for 2021 and 2022, indicating a period of price compression. Typically, such compression accumulates energy that is eventually released in either direction following a break on either side.

At present, the inside yearly candle’s low and high values stand at $1,680 and $2,075, suggesting that a breach of these levels could propel the spot gold market in either direction.

The strong bullish price behaviour implies a greater probability of an upward breakout. A crucial pivot for higher prices lies at $2,075; should the price surpass this threshold; it signal the last opportunity for investors to enter the gold market.

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A closer examination of the gold market’s price compression reveals a range between $1,680 and $2,075 on a monthly basis, with the latter value serving as a significant inflection point. Surpassing this level would open the door for considerably higher prices in the market. Additionally, the formation of an inverted head and shoulder pattern reinforces the bullish outlook.

Medium-Term Price Behaviour

The chart below displays the 20-month and 10-month moving averages for the gold market, which are utilized to observe various market phases through the convergence of these averages.

It has been determined that when the 10-month moving average crosses above the 20-month moving average, it signifies a bullish phase. Additionally, prices above these averages indicate robust bullish momentum within the market.

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Analysing this data reveals that the gold market reached its bottom in 2019, and since then, it has been in a strong bullish phase. Any retracement towards the moving averages was perceived as an attractive buying opportunity. A breakthrough above the critical level of $2,075 will further intensify the momentum, driving gold prices to significantly higher levels.

Key Action for Investors

The gold market has long been considered a store of value, with investors utilizing it as a hedge against economic uncertainty due to its tendency to appreciate during crises.

However, gold prices can exhibit significant volatility, often producing wide-ranging fluctuations and false breakouts before establishing a definitive trend.

To address the challenges of determining entry points in the gold market, the analysis provided above offers key insights. Specifically, it identifies two critical price points at $1,680 and $2,075, with a break beyond either of these levels setting the market’s next direction. The appearance of bullish patterns suggests a higher likelihood of an upward breakout.

Given the strength of the $2,075 pivot, the price may undergo a correction in the downward direction. In such a scenario, optimal entry points for support are identified at $1,900 and $1,960. Conversely, if the price surpasses the $2,075 threshold, it is expected to continue its upward trajectory significantly.

Conclusion

In conclusion, the gold market stands to benefit from the recent upheaval in the banking sector. The negative Treasury yield curve, combined with a slowdown in inflation and a growing labour market, indicates the possibility of an impending recession. Technical evaluations and market analysis further support a bullish outlook for gold in 2023, with crucial price points at $1,680 and $2,075 serving as essential guidance for investors. As bullish patterns emerge and the potential for surpassing the critical $2,075 threshold arises, this may be an opportune moment for investors to enter the gold market. Nevertheless, exercising caution and maintaining a vigilant eye on market trends are crucial for navigating the market’s inherent volatility and identifying optimal entry points for investment.

About the Author

Muhammad Umaircontributor

Personal ● Name: Muhammad Umair, PhD ● An author with FX Empire since January 2023 Education And Work School(s) Attended: PhD in Electrical Power

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