China's Golden Empire and Economic Recession

Written By Luke Burgess

Posted June 21, 2023

The gold market is a bit of a mixed bag at the moment, but there are several positive factors that suggest gold prices could see some upside in the near future.

On one side, we've seen a surge in technology stocks and a general risk-on sentiment in the stock markets. This has somewhat diverted attention away from gold, causing it to trade sideways for a while. However, it's important to note that gold has remained stable near its all-time-high levels thanks to the weakness of the U.S. dollar. This resilience is a positive sign for gold investors.

Although there’s been a slight dip in gold prices due to a triple-top pattern in recent weeks, the big question is whether gold can break through and reach new record highs.

Gold has long been considered a safe-haven asset during uncertain times, and, if conditions align, we could see a renewed interest in gold. Factors that could trigger a new rush into gold include a weakening U.S. dollar, increased gold purchases by central banks, and a general sentiment of risk aversion among investors.

Historically, gold prices tend to move in the opposite direction of the U.S. dollar. When the dollar strengthens against other currencies, gold prices often decline because it becomes more expensive for foreign investors. On the other hand, when the dollar weakens, gold prices tend to rise as it becomes more affordable for foreign investors to buy.

Interestingly, the U.S. Dollar Index (DXY), which measures the dollar's strength against other currencies, has been on a downward trend since December 2022 when the Federal Reserve slowed down its interest rate hikes. This trend, coupled with the current pause in rate hikes, could potentially create a favorable environment for gold to shine once again.

Central banks around the world also play a significant role in the gold market. These institutions purchase gold reserves as a means to support their currencies and protect against inflation.

In 2022, central banks bought a record-breaking 1,136 tons of gold, driven by concerns over inflation and geopolitical tensions. This trend continued into the first quarter of 2023, with central banks adding 228 tons to their reserves.

The World Gold Council expects central banks to maintain their gold purchases throughout the year, indicating a positive sentiment toward gold as a valuable asset. Notably, China has been leading the way, holding $3.4 trillion worth of gold reserves in the first quarter, followed by Japan with $1.3 trillion. China's consistent increase in gold holdings over the past several months further underscores the importance of gold as a strategic asset.

Lastly, there's the possibility of a global economic recession on the horizon, and several indicators suggest we may be heading in that direction.

The CBOE Volatility Index (VIX), which measures market volatility, is currently at its lowest point since before the pandemic. Additionally, the yields on U.S. government bonds have remained inverted since July 2022, and concerns of an overheated stock market due to AI hype are emerging.

In previous instances, these conditions have led to corrections in risky assets and a boost in gold prices. We have witnessed this during the last two global economic recessions in 2008 and 2020.

In conclusion, while the gold market may be navigating various economic factors, there are several reasons to remain optimistic about the potential upside of gold prices. The weakening U.S. dollar, increased gold purchases by central banks, and the possibility of an economic downturn all contribute to a positive outlook for gold.