Yes, 2023 will prove to be an excellent time to buy gold. In fact, it may be one of the last opportunities to buy gold for under $2,000 per ounce during the current economic cycle.
Both the technical analysis of gold prices
as well as the metal's macroeconomic fundamentals are pointing in gold's favor over the next one-to-three years. Below we will discuss why that is the case.
##4 Reasons for Owning Gold in General##
There are two aspects to consider here:
1. The most compelling reasons to buy gold in general.
2. Why now
is an especially opportune time to buy gold.
The case for owning gold is evergreen: There is never really a *bad* time to buy gold. The reasons for gold's general appeal are fairly straightforward.
* Gold has long served as a bulwark against profligate government spending and its resultant currency devaluation.
* The gold price is non-correlated with virtually all other asset classes, providing effective diversification for a portfolio.
* Gold bullion is a tangible asset that has no counterparty risk
* Gold has a track record of remaining valuable that spans several thousand years.
We'll treat each of these reasons one-by-one below.
###1. Gold Is a Currency Hedge###
Throughout the 19th century, most government currencies were backed by gold
. Although the gold standard wasn't a perfect system, it did protect the value of government-issued currencies. Backing money with gold also placed a constraint on government spending (fiscal policy).
In the decades since the gold standard was abandoned, the purchasing power of fiat currencies
has waned dramatically. By contrast, the gold price has risen and largely maintained its purchasing power.
The chart shows the dramatic loss of purchasing power for major world currencies over the last century. Image: WTF Happened in 1971?
This is often described as gold acting as an inflation hedge
. Another way to think about this property of gold is as a hedge against currency devaluation. Every currency in the world has suffered from devaluation over time, so owning gold is essential for preserving wealth and protecting the value of your savings.
###2. Gold Is a Non-Correlated Asset###
For the most part, the gold price tends to move to the beat of its own drum. Sure, outside factors like interest rates do have an impact on precious metals prices
, but they rarely share a strong relationship with other asset classes such as stocks or bonds.
This is what we mean by a "non-correlated" asset. You will rarely—if ever—see the gold price
simply "follow the crowd" of the broader financial markets. It is therefore ideal to hold gold in your investment portfolio for the purposes of diversification. In other words, a diversified portfolio is better insulated from major market downturns: Even if one asset class is crashing in price, proper diversification with gold will greatly mitigate those losses.
It's applying the basic concept of "don't put all your eggs in one basket" to finance and investing. Gold plays an important role in best achieving that goal.
Remember that diversifying your investments means that you shouldn't put all of your eggs in any one basket—including gold!
###3. Physical Gold Has No Counterparty Risk###
Counterparty risk is the potential for the other party in a trade to default on their obligation. In this scenario, the counterparty may be a company issuing stock or bonds, a government issuing debt securities, an exchange offering a derivatives contract, and other kinds of contractual agreements that require payment. If any of these entities faces financial difficulties or bankruptcy, then the financial instruments they traded to you could become worthless (or only pay pennies on the dollar).
Defaults of this nature are not terribly frequent, but they do happen. They are more common in developing markets (i.e. emerging markets) and new market sectors, such as tech and cryptocurrency. When counterparty risk does crop up, it tends to affect entire swaths of the markets.
In bankruptcy proceedings, shareholders are usually the last group to receive compensation. Gold can't go bankrupt.
Physical gold bullion is immune to counterparty risk because *there is no counterparty to worry about*. Once you own the gold, it's yours! There are no counterparties or third-party intermediaries who must be trusted.
###4. Gold Has Been Valuable for Millennia###
Each of the reasons outlined above are contributing factors to this overarching point. Gold has been considered valuable by societies and cultures across human history, from antiquity to the present day. Gold is a scarce resource, and it costs money to mine and refine the metal to a usable state. It will always have value so long as people continue to demand it.
This isn't merely a tradition, as some bankers and government officials have asserted. Gold's symbolic value as jewelry and in artwork isn't the only reason the yellow metal has intrinsic value: gold also has important uses
in electronics, aerospace projects, biotechnology, and other exciting technological applications.
Many components used in outer space must be coated in gold foil to protect from heat and radiation.
Simply put, gold has been valuable for thousands of years, and it will continue to be valuable for thousands more.
##3 Reasons Why You Should Buy Gold Now##
The next question is, why is now an auspicious time to buy gold? Here are some of the primary reasons:
* Governments (through central banks) have been accumulating gold at a rapid pace.
* Market turmoil and widespread uncertainty, like we've seen lately (and on the horizon), are usually bullish for gold.
* Gold also tends to perform well during economic recessions and inflationary periods, like the one we are currently in.
American Gold Eagle coins and PAMP Suisse gold bars are very popular gold investment products.
Let's look at each of these points in greater depth.
###1. Central Banks Keep Buying Gold###
Although many in the traditional banking sector have a habit of denigrating gold as a "pet rock" or "barbarous relic" of a world that no longer exists, central banks remain the largest buyers of gold on the planet
. Central banks are tasked with managing a country's monetary policy, such as adjusting interest rates and acting as the lender of last resort for commercial banks.
Governments have long held stockpiles of gold as a reserve asset. The gold is no longer used to directly back the value of currencies, but it's still an important asset on central bank balance sheets. Of late, a number of central banks (primarily in Asia and Europe) have increased the amount of gold they hold as reserves. This is reflected in the chart below.
Total central bank gold purchases have been approaching record highs.
This begs the question: what are they preparing for?
If gold reserves are merely symbolic, then central banks are engaged in a costly and wasteful tradition. That strikes me as far-fetched.
It's far more likely that the accelerated pace of central bank gold purchases is in response to forecasts for economic conditions in 2023 and the coming years. We'll focus on that in the next two sections.
###2. Uncertainty In Markets Keeps Rising###
When it comes to financial markets, there is no such thing as absolute certainty. There will always be variance—price swings—with any investment. But higher and higher levels of uncertainty are anathema to any investing thesis.
This has absolutely been the case over the past two years or so. Markets have experienced bouts of very high volatility. For example, crude oil
has traded as high as $120 per barrel and as low as $30 per barrel over that time period. Other important commodities such as nickel and lumber
have seen even bigger price swings. This type of volatility may be great for a trader, but it makes life much more difficult for an investor.
Investors can remain calm through market upheavals when they own some gold.
When traditional markets lack clear direction, that typically bodes well for gold. The yellow metal has a proven track record of thousands of years of stability.
###3. Economic Recession Is Increasingly Likely###
Throughout the second half of 2022, early signs of a looming recession began to emerge. Inflation rates spiked to their highest in decades, the Treasury bond market endured a steep sell-off, the red-hot housing sector began to cool off, and (for various reasons) the cryptocurrency market crashed.
In isolation, these are fairly normal market events. But these simultaneous developments have started to erode confidence in the global economy. The war in Ukraine and supply-chain disruptions have exacerbated the decline in sentiment. Perhaps most concerning has been the inverted yield curve
in the Treasury market. Yield curve inversions are one of the most reliable predictors of an impending recession.
The U.S. central bank, the Federal Reserve, is trying to use monetary policy to engineer a "soft landing" for the economy rather than a "hard landing" (i.e. a market crash). Yet even the former scenario implies that economic conditions will have to withstand a period of low growth. Gold has a tendency to hold its value, and even increase in price, during recessionary cycles.
The stock market is likely to struggle again in 2023 after losing roughly 20% of its value this past year. Collectively, public equities lost a combined $8 trillion in market capitalization, the worst annual performance for stocks since the 2008 financial crisis. When traditional investments are struggling, gold usually benefits as the most logical alternative for investors.
##The Gold Price Is at a Turning Point##
Many financial analysts, including most of the big Wall Street banks, now expect gold to reach new all-time highs
in 2023. Very rarely do you see such consensus about gold, which is viewed by most of the wealth management industry as a "pet rock."
In fact, only roughly 1% of investment portfolios include gold—and that number may be as low as 0.5%. This is well below the average from decades previous, so there is still plenty of room for the gold investment sector to grow. The precious metal appears poised for a major turning point
Gold performs best when it is a safe haven amid stormy seas, so to speak. It's an asset that thrives on uncertainty. Economic conditions don't normally change course quickly, except during a crisis or at the end of a market cycle. We could very well get both of those developments in 2023.
These kinds of historical patterns often rhyme with the past. For instance, the gold price jumped about 200% in a very short time frame during the Great Financial Crisis. That doesn't necessarily ensure that gold is imminently heading to $3,000 per ounce
, of course. But I'm confident that we won't see gold trade as low as the $1,600–$1,800 range again until the next economic cycle begins, most likely in 2025 at the earliest.
For an even more context on the case for owning gold, be sure to read Why Gold? Why Now?: The War Against Your Wealth and How to Win It
by a veteran of the gold market, E.B. Tucker.
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