5 Reasons Why Gold’s Shine May Grow Even Brighter

May 18, 2023

A weakening greenback driven by interest rate differentials between the U.S. and other economies such as the U.K., Europe and Japan created an early tailwind for gold and gold equities to start the year. Yet as the year has progressed, our original thesis has been buttressed by additional supports. We’ll outline below the reasons why gold could continue its run. 



  • Gold demand is rising globally among investors, including from central banks, to account for increasing geo-political instability and shifting reserve currency dynamics. 
  • Spot prices are currently trading near all-time highs. If that technical threshold is breached, gold could see further buying. 
  • Mining equities as a proxy for gold ownership also look attractive, with stocks relatively cheap versus direct bullion exposure.

Gold’s rise finds more support

Spot prices for gold are testing record levels, validating our view from the beginning of the year that bullion was entering a bullish phase, as highlighted in our 2023 BMO ETF Investment Outlook.

At the time, our central thesis that gold would move higher was based on the potential weakness of the US dollar (USD) vis-à-vis other currencies, and by extension, gold, driven by the Federal Reserve’s (Fed) slowing monetary-tightening cycle compared to central banks elsewhere, namely the Bank of England, ECB and Bank of Japan. Those watching the USD solely through the lens of the Canadian dollar may not have taken notice, given the Bank of Canada has similarly paused its rate hikes. But the USD Index (DXY) which measures the U.S. currency against a trade-weighted basket of six other currencies illustrates the weakness of the greenback, which is down more than 10% since its September 2022 peak.

We anticipated a major tailwind for gold prices as the pace of U.S. rate hikes slowed, while comparatively higher inflation in Europe, the U.K. and Japan warranted a faster pace of tightening in those respective economies — a headwind for the greenback. As the USD has dropped, spot gold has climbed more than 10%, while ZGD is up more than 22% year-to-date1. Yet while our original thesis remains intact, it’s been bolstered by several other emerging supports, that could boost the case for gold’s current shine to grow even brighter.

Here are five additional supports for elevated gold prices:

1) U.S. debt ceiling

With the decision on whether to raise the debt ceiling looming, concerns of a U.S. default have risen. It’s highly probable that the U.S. Congress will raise the debt ceiling, but credit default swaps (CDS), which represent the cost of insuring against a default, are now at levels far beyond the 2011 crisis, which resulted in the downgrade of U.S. Treasuries. The divide between Republicans and Democrats is far wider than it was then, and holding out on raising the debt ceiling will likely be used for political leverage.

U.S. CDS prices have surged

U.S. CDS prices have surged
Source: Bloomberg, May 122023

2) U.S. banking crisis

The U.S regional banking crisis continues to create uncertainty. A number of U.S. banks have already entered receivership while others have seen market caps shrink significantly on concerns their held-to-maturity portfolios aren’t sufficient to cover depositors. Backstop measures are in place, including greater powers granted to the FDIC to guarantee deposits as well as the Bank Term Funding Program (BTFP). But utilizing these programs would add to the Fed’s balance sheet, potentially stoke inflation, and ultimately cause further USD deterioration.

3) U.S. de-dollarization”

We mentioned in the BMO Views From the Desk podcast several weeks ago that the likelihood of the USD losing its reserve currency status in the near future is virtually impossible. No other currency in the world has the financial markets, economy, or liquidity to displace the dollar. While an immediate de-dollarization” is not possible given the global network and infrastructure that is built upon the USD, its clear the USD is losing favour and rising political tensions will likely not help. Recent developments show other nations are putting the wheels in motion. BRICS nations are discussing a unified currency. Brazil and China want to move away from the USD in settling foreign trades while Saudi Arabia has threatening to sell oil in other currencies.

4) Central bank buying

Central banks have stepped up purchases of bullion in recent years in order to diversify reserves away from the USD. Turkey, China and Egypt alone purchased more than 200 tonnes combined in 2022. Singapore, China and Turkey have continued to add to their reserves with a combined total purchase of around 160 tonnes. Central bank demand is elevating bar premiums,” or the cost of delivering gold bars, as sourcing physical bullion grows more difficult. 

Central banks increasing gold reserves

Central banks increasing gold reserves
Source: World Gold Council, as of September 302022.

5) Rising geo-political risk

Outside of the U.S., concerns on the geo-political front remain elevated. The war between Russia and the Ukraine continues with NATO being involved via proxy. Tensions between China and Taiwan also remain elevated and conflicts continue to escalate in other areas. Gold tends to be a safe haven in times of uncertainty. 


While some of these concerns may not actually transpire, the market prices in risk and as these concerns mount, risk will continue lead to gold’s repricing. Investors should watch the technicals on gold bullion, given it does tend to be affected by supply and demand. The current spot price is trading near all-time highs. Should it break that resistance, gold could see further technical buying. A failure to break the resistance would likely mean a pull back, but we believe the aforementioned reasons supportive of gold tend to be more long-term in nature. 

Gold stocks can also benefit, particularly if we do not see a deleveraging in the stock market, which could potentially come by way of the U.S. banking crisis spreading to other sectors. An escalation of the Russian/​Ukraine war or other geo-political risks could prove another catalyst. Currently, looking at the gold stocks-to-gold bullion ratio, equities look relatively cheap. Furthermore, when looking at the futures curve for gold contracts, it continues to be upward sloping or in contango,” which tends to be good for miners as they extract gold at spot prices and sell in the future at higher prices. 

Gold futures curve remains in contango

Gold futures curve remains in contango
Source: Bloomberg, May 2023.

Gold stock price remain cheap relative to bullion

Gold stock price remain cheap relative to bullion
Source: Bloomberg, as of May 122023.

For those investors looking to gold companies we have the BMO Equal Weight Global Gold Index ETF (ZGD) and the BMO Junior Gold Index ETF (ZJG).

1 BMO Global Asset Management, Bloomberg, as of May 4, 2023. ZGD annualized performance as of April 28, 2023: 1-year: 7.60%; 3-year: 5.44%; 5-year: 12.96%; 10-year: 6.08%; Since Inception (November 14, 2012): 0.99%.

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