Gold set for stable performance in 2023 despite market headwinds

Further weakening of the dollar, geopolitical flare-ups and Chinese growth could support bullion next year, World Gold Council says

Gold typically fares well during recessions, delivering positive returns in five out of the past seven recessions. Reuters

Gold is set to record a stable performance next year despite a mixed set of challenges, the World Gold Council has said.

The interplay between inflation and central bank intervention will be key in determining the outlook for 2023 and the yellow metal's performance, the trade body said in its Gold Outlook 2023 report.

“There is an unusually high level of uncertainty surrounding consensus expectations for 2023,” the WGC said.

“For example, central banks tightening more than is necessary could result in a more severe and widespread downturn.

“Equally, central banks abruptly reversing course — halting or reversing hikes before inflation is controlled — could leave the global economy teetering close to stagflation. Gold has historically responded positively to these environments.”

Geopolitical and economic uncertainty is mounting around the globe after Russia’s military offensive against Ukraine, with inflation also rising due to higher commodity prices and supply chain disruptions.

The International Monetary Fund cut its global growth forecast for 2023 and warned of a cost-of-living crisis as the world’s economy continues to be affected by the war in Ukraine, broadening inflation pressures and a slowdown in China.

The fund maintained its global economic estimate for this year at 3.2 per cent but downgraded next year’s forecast to 2.7 per cent — 0.2 percentage points lower than the July forecast.

Gold demand in the third quarter was boosted by consumers and central banks, although there was a notable contraction in investment demand, the WGC said in a November report.

Economic consensus calls for weaker global growth akin to a short, possibly localised recession; falling — yet elevated — inflation; and the end of rate increases in most developed markets.

This environment carries both headwinds and tailwinds for gold, the latest WGC report said.

A scenario of severe recession or stagflation would be considerably tough for equities, with earnings hit hard, but would provide greater safe-haven demand for gold and the dollar, according to the report.

“The likelihood of recession in major markets threatens to extend the poor performance of equities and corporate bonds seen in 2022,” the WGC said.

“Gold, on the other hand, could provide protection as it typically fares well during recessions, delivering positive returns in five out of the last seven recessions.”

However, a recession is not a prerequisite for gold to perform, the trade body said.

A sharp retrenchment in growth is sufficient for gold to do well, particularly if inflation is also high or rising, it said.

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On the flipside, a less likely “soft landing” scenario, where business confidence is restored and spending rebounds, could be detrimental to gold and benefit risk assets, according to the report.

Next year could result in a reversal of the dynamics at play in 2022, which were high retail investment demand but weak institutional demand.

“The retail investor segment appears to care more about inflation than institutional investors, given a lower level of access to inflation hedges. They also care about the level of prices,” the report said.

“Even with zero inflation in 2023, prices will remain high and are likely to impact decision-making at the household level.”

On the other hand, institutional investors assess their level of inflation protection through the lens of real yields. These rose over the course of 2022, creating headwinds for gold.

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Further weakening of the US dollar as inflation recedes could provide support for gold next year, while geopolitical flare-ups will continue to make bullion a valuable risk hedge, the WGC said.

Chinese economic growth should also improve next year, boosting consumer gold demand, it said.

However, pressure on commodities, due to a slowing economy, could provide headwinds to the yellow metal in the first half of next year.