Gold and silver prices stable despite interest rate hike and outperforming stocks in 2022

On The Silver Mountain blog, we share information on the current economic situation, gold and silver prices and other relevant information related to precious metals. In this blog article, we take a closer look at the effect of the interest rate hike for gold and silver and the return of gold and silver relative to the stock market.

Effect of interest rate hike gold and silver

When we talk about inflation, we often refer to inflation based on the consumer price index, CPI for short. The CPI reflects the price trend of a standard basket of goods and services that households purchase for consumption. For instance, inflation in the US was 7.1% in the month of November and 7.7% in the month of October (source: global-rates.com). In the Netherlands, inflation was 9.9% in the month of November and as high as 14.3% in the month of October (source: CBS.nl).

Last week, the Federal Reserve System (FED) raised interest rates by 50 basis points. Jerome Powell, chairman of the FED, signalled a further increase in interest rates to get inflation under control. By this, Powell is referring to another series of interest rate hikes in the first quarter of 2023.

The ECB also raised interest rates by 50 basis points last week. An increase of 75 basis points was expected. At this, Christine Lagarde, ECB president, signalled a further increase in interest rates to continue the fight against inflation. Never before had interest rates been raised so quickly. The ECB forecasts inflation of 6.3% in 2023 and only around 2% in 2025. 

Gold and silver out perform equities in 2023

In euro terms, the price of gold posted a 5.2% return this year. An investment in silver did even better, rising 7%. With that, both precious metals outperformed an investment in equities. For instance, the AEX stands at a loss of more than 10% this year and the S&P is as high as 17.8%.

Investments in physical gold and silver fared much better than an investment in gold mines. The index of gold mines stands at an 8% loss in euros this year. The euro itself has lost about 7% against the US dollar in 2022. If you had left your money in the bank, this caused an average inflation rate (in the Netherlands) of 10.03%. At an average annual inflation rate of 10%, the purchasing power of your assets decreases by as much as 50% over a 6.5-year period. 

Gold and silver forecast 2023

Michael Widmer, Bank of America analyst, expects silver prices to rise in 2023. Widmer also sees gold benefiting from a so-called pivot from the FED. In addition to the Fed's monetary pivot, the bank expects silver to benefit from a pick-up in demand for silver from industry. Industrial demand for silver to produce electric cars and solar panels is at an all-time high and will only grow in the coming years.

Saxo Bank, an investment bank in Denmark and part of the Saxo Bank Group, argues that the Fed's rate hike and tightening of monetary policy has gone too far, forcing the Fed to stimulate again at a later date. As a result, gold prices are expected to continue rising in 2023.

Disclaimer: The Silver Mountain does not provide investment advice and therefore this article should not be considered as such. Past results do not guarantee future results.