In 2023, It Will Be All about the Dollar

The comments below are an edited and abridged synopsis of an article by Alasdair Macleod

In post-Christmas trading, gold was $1,815 and silver was $23.82. By the last trading day of 2022, silver had risen 2.6%, while gold had fallen 0.8%. The two outperformed bonds (US 10-year Treasury bond price was down 17.2%)  and equity markets (S&P down 20%).

In 2023, It Will Be All about The Dollar - BullionBuzz - Nick's Top Six
Dollars closeup. Benjamin Franklin’s portrait on one hundred dollar bill.

One factor supporting gold in the final quarter was central bank demand, which the World Gold Council estimates to have been 364 tonnes by October. Recent purchases by China and others adds nearly 300 tonnes.

Why China bought this gold is puzzling. It likely has to do with President Xi’s recent visit to Saudi Arabia, where it was agreed that sales of oil would be paid in yuan, replacing the petrodollar with petroyuan. Saudi exports to China are said to be worth $33.4 billion, while its imports are $31.8 billion, so the net surplus is $1.6 billion. The official communiqué referred to “leveling up trade, investment and financial cooperation.”

China is keen to internationalize its markets, which is what investment and financial cooperation is about. The Shanghai Gold Exchange will be used by Saudi Arabia for its yuan-to-gold transactions. Some of China’s purchase of nearly 300 tonnes in recent weeks will be to provide liquidity to backstop this market.

Regarding 2023’s gold price, the major factor will be the fate of the US dollar. Oil in dollars will likely increase in coming months, while foreign holders of dollars will continue to reduce their dollar exposure, which in the year to October declined by $3.8 trillion. But with a rising interest-rate trend leading to falling financial asset values and the petroyuan replacing the petrodollar, events could coalesce into a perfect storm for the dollar.

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