Gold May Have to Fight With Dollar Recovery

Written by Luke Burgess
Posted January 4, 2023

I hope you’re having a great start to the new year.

Gold sure is.

Gold prices reached a six-month high of over $1,850 an ounce yesterday after slowly climbing in December.

Gold Price — One Year
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Gold’s market sentiment was pretty weak in the summer and fall of 2022, but by the end of the year, that changed — at least for those paying attention.

I’ve really wanted to bring this up with you for a few weeks but have been biting my tongue about it because the last thing you want to do is stick your foot in your mouth, especially when you’ve got money on the line.

But I pretty much nailed it again.

Back on November 9, I wrote to you saying this…

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The exact bottom for gold prices was November 3. There was a weekend, and it took time to write, edit, submit, and post, but I pretty much identified the exact bottom for gold prices within hours of it happening.

Gold Price — One Year
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Honestly, it was not luck.

I spend an almost-obsessive amount of time watching gold and related markets.

At any given time, I can pretty much tell you exactly what’s happening in the gold market and give you gold’s price within a $10 range. That’s because, at any given time, I’m less than six hours from checking the gold markets. So I really should be able to identify tops and bottoms.

At any rate, gold’s market sentiment has swung bullish, and many investors are expecting big things from gold this year. Here are just a few headlines:

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I’m also very bullish on gold for 2023.

But you need to hear this…

The first and second quarters of 2023 might be tough for gold prices.

In fact, I actually think gold prices are at or nearing a short-term top right now.

That’s partially because a six-month high is going to trigger some profit-taking. Gold prices bottomed out at nearly $1,630 per ounce only eight weeks ago, and the beginning of the year is a good time to take profits, considering taxes.

But more to the point, an unexpected short-term recovery in the U.S. dollar might negatively affect gold prices.

The value of the U.S. dollar (as measured by the U.S. Dollar Index) peaked at the end of September and continued lower as inflation eased and investors began to speculate that the Fed would begin to slow its campaign of interest rate hikes.

U.S. Dollar Index — One Year
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At the last FOMC meeting in mid-December, the Fed raised rates by 0.5%, compared with the 0.75% increase it had tacked on during the past four meetings. That confirmed analysts' expectations of a more dovish Fed and put more downward pressure on the greenback.

Of course, the next FOMC meeting is still four weeks away, and much of the Fed’s decision will be based on inflation data from December. But if the Fed raises interest rates again by 0.5% at the end of this month, the U.S. dollar may see a bit of a recovery, and that would be negative for gold prices.

If, however, the Fed increases interest rates by only 0.25% at the next FOMC meeting, the dollar will certainly continue to suffer and gold will go higher.

According to CME Group, the probability of a 0.25% increase at the next FOMC meeting is just over 70%.

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Of course, these probabilities will change once analysts see CPI data for December, but that’s what they are right now.

It’s my guess, however, that inflation did not come down very much in December.

The most significant decrease in prices in December was probably in gasoline. According to the EIA, the monthly average price of retail gasoline fell from $3.685 per gallon in November 2022 to $3.210 per gallon in December. That’s almost a 13% decrease.

Meanwhile, food and housing costs remain stubbornly high.

So I think CPI will probably be a bit lower in December due to gasoline prices, but I don’t think it will be low enough to prompt the Fed to cut rate hikes again.

My point is I think there’s still a good chance the Fed will increase interest rates by 0.5% at the next FOMC meeting. That move would be neutral or positive for the dollar and neutral or negative for gold.

Nevertheless, it’s widely expected the Fed will stop raising interest rates sometime this year. I might be a little pessimistic, but I don’t think it'll completely stop raising rates until the beginning of summer.

So while I am very bullish on gold prices for this year, it might be best to hold off on doing any buying for the next few weeks, or at least until December CPI data is out.

Until next time,
Luke Burgess Signature
Luke Burgess

Luke’s analysis and market research reach hundreds of thousands of investors every day. Through his work with the Outsider Club and Junior Mining Trader, Luke helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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