And who says that gold does not protect against high inflation? Yes, in 2022, the precious metal was unimpressive, to say the least, as consumer prices in the U.S. and Europe spiked to their highest levels in decades. But it has outperformed both stocks and bonds. And the devaluation of the lira on the back of CPI growth of more than 80% made the Central Bank of Turkey the largest buyer of gold. Its reserves rose by 148 tonnes to 542 tonnes over the year. At the same time, the demand for jewelry in the country jumped 32% in the fourth quarter.

According to the World Gold Council, interest in the precious metal in 2022 increased by 18% to 4,741 tonnes, the highest level since 2011. The main contribution was made by central banks, which bought 412 tonnes in October–December, 12 times more than during the same period in 2021. The annual figure was 1,136 tonnes, more than doubling from the previous year. We are talking about the highest level in the last 55 years!

Dynamics of gold purchases by central banks

Demand from central banks will support gold in 2023, even if it slows down. However, there is something to replace it. It is hardly worth counting on the continued outflow of capital from specialized exchange-traded funds, which took place in 2022. All this creates a solid foundation for an upward trend in XAUUSD. Moreover, the macro environment also contributes to the continuation of the upward rally.

If in 2021–2022, the main source of higher inflation was the United States and the eurozone, in 2023, it will be China. The country came out of the lockdowns, and looking at the experience of North America and Europe, we can assume that it will face abnormally high rates of GDP and price growth. At the same time, the U.S. could plunge into recession, which would increase demand for the precious metal as a safe haven asset amid a weakening U.S. dollar. Add to that the high risks of a dovish Fed reversal this year, and monetary policy-sensitive gold will spread its wings even more. The issue of its growth above $2,000 per ounce can be considered resolved. There is another topic on the agenda. Will the XAUUSD make a new record high of 2020?

The fall of the precious metal to $1,900 on the eve of the Fed meeting looks logical. Markets are worried about Jerome Powell's intention to hurt them the same way he did in 2022. Back then, investors' excessive optimism forced the Fed to take up the whip so as not to loosen financial conditions ahead of time. However, the slowdown in U.S. wages to 4% in the fourth quarter became the catalyst for the dollar's decline and put the bulls on XAUUSD back in the game. Signs of weakness in the labor market suggest that the Fed should not go overboard with tightening monetary policy.

Technically, the formation of a pin bar with a long lower shadow on the gold daily chart is a powerful bullish signal. A successful assault on its high near $1,931 an ounce is usually used to open long positions. Or to build up previously formed longs on a pulback to $1,907, as mentioned in the previous article.