Although the outlook for gold is currently «constructive,» interest rate policies of the central banks are limiting the upside potential for the time being. But some oracles are forecasting dizzyingly high gold prices in the new year. Is that realistic?

Michael Burry of «The Big Short» fame thinks the time for gold has come, and «Bond King» Jeffrey Gundlach considers the precious metal to be interesting, while hedge funds recently increased their long exposure in gold and further reduced their short bets. After a difficult year with strong headwinds, the gold market is on an end-of-year upswing.

Although gold prices sagged for several months this year, they clearly outperformed other asset classes such as equities or bonds, especially from the perspective of non-dollar investors. Despite the round of interest rate hikes by the leading central banks in December, the price per ounce is currently holding relatively steady at around $1,800.

The question now is will gold start to soar next year, as some are now suggesting?

Central Banks Stocking Up

In times of economic and geopolitical uncertainty and high inflation, central banks increasingly turned to gold as a store of value over the course of the year. In the third quarter, central banks around the world bought the largest volume of gold in a single quarter since 1967. That was a time when gold still backed the dollar as the world's reserve currency.

As global economic uncertainties are likely to persist for quite some time, central banks will probably continue to increase their gold holdings in the coming months. The latest data from the World Gold Council (WGC) shows that Turkey, Uzbekistan, India, and Qatar were the biggest buyers of gold in the third quarter.

Is Russia Secretly Buying?

But a significant amount of gold has also been bought by central banks that have not publicly reported their purchases, and the WGC did not provide any further details on which countries these might be.

There are market rumors that Russia, in particular, may have ramped up its gold holdings substantially. China and Russia are among the countries that do not regularly publish information about their holdings. Many market observers suspect that Russia is buying up a large part of its gold production in order to become less dependent on the dollar. However, it remains unclear who exactly the «secret» buyers are.

Zoltan Pozsar of Credit Suisse, known for his writing style and unconventional analysis,  caused a stir in the gold market with his December analysis. He looked at the United States' strategic petroleum reserve, Russian oil, and gold, and speculates the price of gold could climb to $3,600 dollars a troy ounce.

Unholy Alliance

His latest thesis is that if Russia accepts gold as payment for crude oil in response to the G7 oil price cap, the price of gold could double. «Crazy? Yes. Unlikely? No,» he writes in his letter. Before joining Credit Suisse in February 2015, Pozsar was a senior advisor to the US Treasury Department, among other positions.

If Russia decides to peg its oil to gold, it could use gold as a means of payment again, and its value would rise sharply, he explained. If governments were to pay for oil with gold, Pozsar further postulated, it could trigger a liquidity crisis at banks that operate in the paper gold market.

«Monstrous Level»

A gold price as high as Pozsar's sees is also deemed possible in Denmark. In its outrageous predictions for 2023, Saxo Bank lists reasons for skyrocketing gold prices.

Chief economist Steen Jakobsen predicts the markets would realize next year that the assumption of only temporary inflation was wrong and that inflation would remain high. In response to the failure of central banks to get a grip on price increases and second-round effects, gold prices will reach $3,000, he said.

Prices in Check

Apart from such speculations and hypotheses, the outlook for gold is constructive, but the start of the new year is likely to be bumpy. Gold investors will probably have to remain patient for the time being. The market environment that weighed on gold prices so far this year, especially the aggressive monetary policy of the US Federal Reserve, will remain in place at least during the first half of 2023.

Although inflation has eased since the summer, Fed Chairman Jerome Powell made it unequivocally clear at the last meeting that the central bank's work is not yet done. According to a number of gold experts, prices around $1,800 dollars per ounce can be expected for the time being, and temporary phases of weakness are also possible. Many economists think the Fed is nearing the end of its tightening cycle, which could be good for gold from the second half of the year.

Henrik Marx, head of precious metals trading at Heraeus Precious Metals, expects inflation to ease further and a weakening US economy becoming the focus of monetary watchers. The key question, he says, is when the Fed will reverse the trend and stop raising interest rates or possibly even roll them back, leading to a change in the rate dynamic that could lead to a change in direction for the dollar, and subsequently a change in trend for gold.

Monetary Policy Casts its Spell

US fund giant State Street also believes the stance of global monetary policy and the risk of a global economic recession will be key drivers for gold in the year ahead. The precious metal could gain strength due to a pause in monetary policy tightening, a weaker dollar, and continued volatility in the wake of geopolitical uncertainty, it says.

In the base scenario, which assumes the US avoids a severe recession, State Street sees gold prices in a range of $1600 to $1900. In a bullish scenario, with a 20 percent probability, the potential trading range for gold is $1,900 to $2,000, as the Fed pivots and begins to cut interest rates in response to deteriorating economic data as the United States heads toward a prolonged recession.

Risks Neglected

At ETF specialist Van Eck, gold expert Joe Foster sees an opportunity for gold to strengthen its recovery and return to its all-time high of around $2,000. But for that to happen, investment demand would have to increase. For Heraeus strategist Marx, too, the investment side will tip the scales.

Foster believes that risk factors such as persistent and elevated inflation worldwide, a weakening economy, and geopolitical uncertainties argue in favor of a higher gold price. The market still seems to ignore such risks, but in his opinion, the probability of higher gold prices in 2023 and beyond is increasing.