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4 Reasons Why Gold ETFs May Stage a Comeback in 2023

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After wild swings, gold started showing a rebound since the start of the fourth quarter of 2022. The fall in the U.S. dollar and a decline in treasury bond yields bolstered the demand for the yellow metal. Additionally, the higher demand for hedge against inflation and growing recession fears are driving investors toward gold, as it is considered a safe haven. Several analysts are projecting record highs for the precious metal in 2023.

Gold ETFs rallied last week with GraniteShares Gold Trust (BAR - Free Report) , iShares Gold Trust (IAU - Free Report) , SPDR Gold Shares (GLD - Free Report) , iShares Gold Strategy ETF (IAUF - Free Report) , and Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL - Free Report) gaining around 1%. Gold prices are now hovering around a six-month high level.

Below we highlight a few factors that can drive gold ETFs further in 2023.

Recessionary Fears to Boost Safe-Haven Gold

Several market watchers expect the U.S. economy to slip into recession in the near term due to faster and hefty Fed rate hikes in 2022. The consensus estimate on the probability of a meaningful downturn in the U.S. economy in the next 12 months is at 65%, according to Goldman Sachs Research. But Goldman’s own economic analysis rates that probability much lower at 35%. Whatever be the case, if there is a recession or soft-lading, gold may gain some strength. 

Inflation Is Still High

Though U.S. inflation has been showing a downtrend lately, it is still stubborn. The annual inflation rate in the United States slowed for a fifth successive month to 7.1% in November of 2022, the lowest since December 2021, and below forecasts of 7.3%. It follows a reading of 7.7% in October.  The personal consumption expenditure price index in the United States increased 5.5% in November 2022, which is way higher than the Fed’s target of 2%. Gold is often viewed as an inflation-protected asset.

A Likely in Decline in the Greenback 

Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) is down 1.4% past month. If the greenback falls, gold prices will gain as the metal is priced in the U.S. dollar. With the release of some downbeat economic indicators to start New Year, the Fed may slower the rate hike momentum in the coming days. If it happens, the U.S. dollar may lose strength further. As most commodities are priced-in the U.S. dollar, gold prices are sure to shine. Plus, a decline in bond yields should also go in favor of non-yielding bullion prices.

Demand for Gold Remain Strong from Central Banks

Central banks purchased about 400 tons in the third quarter of 2022, the maximum on record, according to the World Gold Council's quarterly report, quoted on Year-to-date, the official sector acquired 673 tons, more than any other annual total since 1967 — when the U.S. dollar was still backed by gold. China's reported gold reserves increased last year for first time since 2019, per Reuters.

During the past few years, the central banks of developing countries have become major buyers of gold, bringing total gold reserves back to levels last seen in the 1990s, at around 37,000 tonnes, per Economic Times.

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