ABX:CC - Buy Gold In October 2023: The Planets Are Aligning For Its Resurgence

2023-10-13 16:37:46 ET

Summary

• Gold has had a rough run in recent months, however, it has made a pretty strong comeback in recent weeks.
• We share four reasons why we believe gold has a shiny outlook for the foreseeable future.
• We also share some of our favorite ways to invest in the yellow metal.

ActivTrades senior analyst Ricardo Evangelista said yesterday that:

Lower yields, a softer dollar, and uncertainty about the conflict in Israel are all positive for gold. I think the planets are starting to align for a bit of gold’s resurgence.

In this article, we are going to look at the various factors that are aligning to lead to what we believe will be a resurgence for gold ( GLD )( IAU )( PHYS ) in the coming months and years.

Safe-Haven Amidst Geopolitical Unrest

The ongoing conflict in the Middle East has sent shockwaves through global markets, with investors rushing to shield their portfolios from the ensuing uncertainty that the conflict may spread throughout the region and ultimately even lead to a conflict that embroils two major oil exporters in Iran and Saudi Arabia. Gold, with its historical precedent of being a safe-haven asset, has witnessed a significant jump since the war broke out, marking its best week in seven months , as the conflict between Israel and the Islamist group Hamas escalates.

Moreover, the ongoing conflict in Eastern Europe between Russia and Ukraine and its Western Allies as well as the growing tensions in East Asia between North Korea and South Korea and between China and Taiwan - with the potential for catastrophic wars to erupt from any of those hot spots - provide additional incentive to own gold during these geopolitically volatile times.

Hedge Against Inflation

Gold has traditionally been an effective hedge against inflation. With the global economy experiencing significant volatility and uncertainty at the moment and various nations still trying to balance fighting off inflationary pressures with trying to avoid falling into recession, gold looks like an increasingly prudent investment.

Despite the gold price initially falling more than 11% from its May high due to the Fed's hawkish outlook, the precious metal still holds potential for price appreciation in the coming years...

And it has already begun to make a comeback in recent days:

Moreover, it seems probable that the U.S. Government will continue its runaway deficit spending for the foreseeable future. Consequently, this will exert significant pressure on the Federal Reserve to eventually reduce interest rates, potentially resulting in negative real interest rates in the long run. As a result, inflation rates are expected to surpass nominal interest rates, creating a highly favorable scenario for gold over the long term.

Seasonal and Historical Trends

Another reason to be bullish on gold right now is that historically, gold has demonstrated a pattern of delivering positive average returns of 0.71% and 1.3% in November and December, respectively, due in part to a rise in jewelry demand and a generally weaker dollar in December. As a result, if history is any guide, buying gold in October could be a great risk-adjusted move.

Central Bank Purchases

The recent surge in central bank purchases of gold underscores the precious metal's enduring appeal amidst global economic and geopolitical tumult. Central banks, both from advanced economies and emerging market/developing economies (EMDE), are amassing gold reserves at a pace not seen for over 50 years, with these entities accounting for 34% of total gold demand in the third quarter of 2022 and their rapid pace of buying continuing into 2023.

This buying spree was likely prompted at least in part by the geopolitical upheaval caused by the conflict in Ukraine and the resultant sanctions on Russia, prompting a re-evaluation of U.S. dollar reserves' vulnerability. This is evidenced by the fact that 42% of banks anticipate a decline in U.S. dollar holdings, according to a World Gold Council survey . Furthermore, nations like Russia and China have been aggressively purchasing gold, potentially as a safeguard against foreign asset seizures. EMDE banks, often more proactive in their gold-buying endeavors than their Western counterparts, clearly increasingly view gold not merely as a historical store of wealth, but as a strategic asset that provides a buffer against potential payment crises arising from current or future sanctions and insulating their often more fragile economies against global financial crises.

If this strong central bank demand continues - which it is showing no signs of slowing down - it will likely provide a pretty strong tailwind for gold prices over the long term.

Investor Takeaway

Thanks to its multi-millennia history of being a safe-haven asset, gold is once again catching a bid due to rising global geopolitical unrest, driven by conflicts in the Middle East, Eastern Europe, and East Asia.

Furthermore, gold serves as a hedge against inflation, especially as the global economy faces uncertainty and inflationary pressures. Despite a recent drop in gold prices due to the Federal Reserve's hawkish stance, it is expected to appreciate in the coming years, given the likelihood of continued deficit spending and potential negative real interest rates for years to come.

Historical trends also favor gold, with positive returns in November and December due to increased jewelry demand and a weaker dollar during that period. Last but not least, central bank purchases of gold have surged, driven by concerns over geopolitical upheaval and sanctions on Russia. This trend is particularly notable in emerging markets and developing economies, where gold is seen as a strategic asset to protect against payment crises and global financial instability. This strong central bank demand is expected to support gold prices in the long term.

There are many great ways to invest in the yellow metal, including holding physical bullion in a secure location, investing in ETFs like GLD, IAU, or PHYS, or even buying gold miners and streaming/royalty companies through ETFs like GDX or directly via leading global miners and streamers like Barrick Gold ( GOLD ), Newmont Corporation ( NEM ), or Wheaton Precious Metals ( WPM ). Personally, I think that an all-of-the-above approach makes a lot of sense because each form of investment has its pros and cons and helps to insure against a host of potential outcomes, which is the main purpose of investing in gold in the first place.

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