Will the Gold Price Finally Reveal Its Future Direction?

The gold price in Hungarian forints could surge to HUF 30,000 to 40,000 per gram, yet a significant correction cannot be entirely ruled out either. Which scenario is more likely over a one-year horizon?

Taking into account the enormous degree of uncertainty, gold can be described as distinctly undervalued — particularly when one looks at its inflation-adjusted price curve: on that basis, the all-time high reached in 1980 would only be surpassed at USD 2,600 per troy ounce in today's money.

At first glance, the yellow metal's current price range of USD 1,830 to 1,850 represents a particularly attractive entry point relative to the "all-time high" of USD 2,600. Since the vast majority of Hungarian investors hold their gold savings in HUF, we need to monitor not only the EUR/HUF rate but also the EUR/USD rate.

To map the possible scenarios, we have prepared the price matrix below, which illustrates how the HUF gold price could evolve under four different currency market scenarios.

We see a significant probability that the Fed's rate hikes will cause the dollar to strengthen below parity against the euro — that is, from the current level of around USD 1.05, the dollar could strengthen to 0.95 or below against the euro, which might temporarily depress the gold/USD price (assuming Fed rate hikes do not tip the US economy into recession, forcing a resumption of money printing).

If a simultaneous strengthening of the HUF were to occur, the HUF gold price could fall 10 to 15 percent below current levels, to somewhere in the range of HUF 16,500 to 17,000.

This scenario would, of course, require a great many positive developments for the HUF market before year-end: disbursement of EU funds to Hungary, the avoidance of a more serious collapse in equity and bond markets, a swift resolution to the Russia-Ukraine conflict, a successful suppression of inflation, a normalisation of energy and commodity prices, and a recovery in global trade flows.

We assign a considerably higher probability to the scenario in which global inflation proves impossible to bring under control by June 2023, the Russia-Ukraine war drags on, and Europe continues to suffer significant economic damage as a side-effect of sanctions on Russian commodities — causing the euro and the HUF to weaken in tandem against the dollar. This would translate into a significant price increase on the European and particularly the Hungarian gold market even if the gold/USD price were to decline: a per-gram price in the range of HUF 25,000 to 30,000 could easily become a reality next year.

A further possibility is that, reinforcing the above, the Fed's rate hikes eventually tip the US economy into recession, prompting a resumption of money printing. Should this scenario materialise, the all-time gold/USD high could be reached or surpassed, which would dramatically amplify the increase in the HUF-denominated gold price — making a per-gram price above HUF 40,000 far from surprising.

Which scenario ultimately plays out — as may perhaps be apparent from the above — depends on a great many unforeseeable events. Starting from the current market situation, however, we consider one of the last two columns in our scenario matrix to be the most likely outcome, and in view of the daily-increasing uncertainty, allocating at least 20 to 30 percent of liquid (non-real-estate) assets to physical gold appears to be a sound idea.