Throughout the first half of 2022, the resilience of gold prices was evident, despite the strengthening dollarThis period illustrated gold's crucial role as a safe haven amid rising inflation and geopolitical tensionsTypically, gold has maintained a strong negative correlation with the dollarHowever, this correlation manifested strongly during the third quarter of the year, as London cash prices began to decline in July, reaching a low of $1,614 by SeptemberCurrently, gold prices are stabilizing around approximately $1,766 per ounce.

The drop in gold prices during the third quarter has fueled an increase in physical demand for gold across global marketsYet, looking to the future, various risks could potentially drive gold prices higher, returning them to the bullish trend that has persisted since 2016.

Central Banks Make Record-Breaking Gold Purchases

In recent months, the United States has been raising interest rates incessantly, pushing the yield on the 10-year Treasury bonds above 4% for the first time since 2008. Yet, in October, the dollar failed to achieve new highs

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This situation led the market to question whether interest rates had indeed peaked, aiding gold's stabilization above the $1,600 threshold.

Gold prices have been under pressure from the continued strength of the dollar, a direct consequence of the Federal Reserve's interest rate hikes and market expectations that such measures will successfully curb inflation.

Historically, whenever gold prices weaken, there tends to be a corresponding increase in physical demand for gold from Asia and the Middle EastThis current lull in gold pricing is no exception, as buyers from China, India, and the UAE recognize this moment as a buying opportunityBloomberg has indicated that traders in Dubai, Istanbul, and Shanghai are paying more than the spot prices in LondonSince April, over 527 tons of gold have exited vaults in New York and London, with Chinese imports hitting their highest levels in four years as of August.

Strong demand is also being exhibited by central banks

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According to a report from the World Gold Council, banks purchased a record-breaking 399 tons of gold during the third quarterSuch physical demand could help stabilize gold prices at current levels.

However, a historical perspective shows that gold has a predominant negative correlation with real interest ratesShould inflation rates remain at the current levels—7.7% for the Consumer Price Index (CPI) in October—or close to this level, real interest rates would turn negative with a federal fund rate of around 5% (if the Fed continues raising rates to that level). This scenario would be advantageous for goldCurrent projections suggest that gold prices may consolidate in the range of $1,650 to $1,700 per ounce in the near future.

Despite this stabilization, there are compelling reasons to anticipate future increases in gold prices.

Gold Could Return to a Bull Market Trend

In the realm of exchange rates, many analysts are closely monitoring the extraordinary appreciation of the dollar alongside the decline of many other global currencies

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The following chart illustrates gold prices denominated in local currencies.

In this chart, a gray line represents gold's price in dollars, while green and blue lines represent gold prices in pounds and yen, respectivelyGold prices in local currencies may periodically outperform or underperform dollar-denominated gold, but historically, these three prices tend to align closely.

Nonetheless, the rectangular portion of the chart highlights the notable discrepancy recently between dollar-denominated gold and gold valued in the other two currenciesIn fact, such a difference has never been recorded since 1972. These exchange rate discrepancies reflect the extraordinary risks facing the world today.

1) Ongoing geopolitical risks are escalatingThe Heritage Foundation’s 2023 Index of U.SMilitary Strength has downgraded U.Smilitary prowess to a "weak" status, citing deteriorations in shipbuilding, maintenance delays, aging aircraft, pilot shortages, insufficient ammunition stocks, and a lack of new recruits

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Current U.Sdefense spending is around 3% of GDP, down from 5%-6% in the 1980s.

2) Prolonged high inflationRecently, several indicators indicate increasing macro risksCPI and PPI inflation remains elevated in the U.S., with a year-on-year CPI increase of 8.5% in September (albeit showing a slight decline in October). A Deutsche Bank study analyzing 126 observations globally since 1970 shows that once inflation exceeds 8%, it tends to remain above 2% for at least four years.

3) Heightened recession risksThe IMF president has stated, "A global recession is likely." Economists estimate a 63% chance of the U.Sentering recession within the next 12 months, an increase from July's 49% estimate.

4) Two additional areas of risk, often overlooked in the market, involve debt and international currenciesRising interest rates are making debt repayment a major expenditure in the U.S

federal budgetHowever, the issue extends far beyond the U.S., as many countries around the globe are accumulating rising debt levelsWith existing debt now being subjected to higher interest rates, repayment will consume a growing proportion of global GDPAn April 2021 estimate of G7 interest payments through 2026 shows that few anticipated the increasing costs associated with debt servicingAs tighter monetary policies are adopted by more economies, debt risks are likely to escalate.

5) Black Swan events, such as the UK's Liability Driven Investment (LDI) crisis, which rocked marketsThe Bank of England had to intervene urgently to stabilize the situation after the UK pension sector embraced a liability-driven investment strategy.

We believe all of these risks are potential catalysts that could drive gold prices higher, potentially restoring gold to its bull market trend that has existed since 2016.

Recently, the Federal Reserve’s halt on its tightening plans could act as a significant catalyst for rising gold prices