In a mild global recession with slowing inflation, a weaker US dollar and the end of interest rate hikes, gold is bound to post a “stable but positive performance” this year, the World Gold Council said in its Gold Outlook for 2023.
The price of gold went on a rollercoaster ride in 2022. Russia’s invasion of Ukraine, which sparked a rush to safe-haven assets, sent it above USD 2,070 an ounce in early March, near the all-time high the precious metal reached in August 2020. The price began to decline in June when the US Federal Reserve ramped up its rate increase cycle to fight inflation. From that March peak, the gold price tumbled 22%, to just above USD 1,614 per ounce by early November when the Fed delivered its fourth, supercharged, 75 basis point, interest rate hike.
Gold price performance in 2022
The gold price has been on an upward trajectory in recent weeks helped by signs that US inflation is finally cooling, giving the Fed room to slow the pace of rate hikes. In 2023, gold may be able to keep up this positive momentum.
Spot gold finished the last trading day of 2022 at USD 1,824 USD per ounce, compared with USD 1,828 per ounce a year earlier, finishing the year almost flat.
Falling inflation rates
Economic consensus calls for weaker global growth “akin to a short, possibly localized recession,” and falling – yet elevated – inflation, Juan Carlos Artigas, global head of research at the World Gold Council and his team, said in the 8 December report. They added that 2023 will also bring interest-rate hikes to an end in most developed markets.
“This mixed set of influences implies a stable but positive performance for gold,” the World Gold Council economists said.
Economists are currently predicting global growth to be just 2.1% in 2023, which would mark the slowest pace of global growth in four decades, excluding the COVID-19 pandemic and the financial crisis of 2007-2008. For comparison, global growth was 6% in 2021 and an estimated 3.2% in 2022.
The US and some other large economies, like the UK, the Eurozone and Canada may be slipping into a recession, which would put pressure on corporate earnings and stock market valuations. The combination of a mild recession and weaker earnings have historically been positive for gold, according to the World Gold Council report.
Rate increase shock
The global economy has gone through various shocks last year, with the biggest one being central banks’ aggressive rate increases as they were fighting the highest inflation rates in 40 years. This was the most crucial factor affecting the gold price as well. Gold has no yield and higher interest rates diminish its appeal in comparison with interest-bearing instruments, such as the US dollar and US government bonds.
The Fed raised US rates seven times in 2022 to a range of between 4.25% and 4.50% from a range of 0% to 0.25% at the start of the year. After four back-to-back, large-scale, 75-basis-point increases, the Fed carried out a less steep, 50 basis point rate hike in December. Even so, it signalled that rate increases will continue as there is more work to do to curb inflation. According to policymakers’ latest projections, US rates are set to go above 5%.
Economists at the Gold Council expect monetary policy to remain tight until at least mid-2023, as no central bank will want to lose its grip on inflation expectations.
Easing mode begins
However, as the rate increases work to slow inflation next year, that will, eventually, have an implication on monetary policy, according to the report. In the US, markets expect the Fed to start cutting rates in the second half of 2023, and by 2024 most major central banks are expected to be in easing mode. This would help support the gold price.
Another factor affecting gold prices is the value of the US dollar. Gold and the US dollar has an inverse relationship because gold contracts are priced in US dollars and weaker greenback makes buying gold cheaper in other currencies.
After strengthening for two consecutive years, the US dollar has been on a downward trend recently. The US currency, as measured by the US dollar index, DXY, which tracks its value against six of its counterparts, reached a two-decade high of 114.78 in September last year, and has since declined by 9%.
Further dollar weakness should bode well for gold, according to the Gold Council report. The US dollar index peaking historically led to higher gold prices 80% of the time, the Gold Council economists said.
'Soft landing' scenario
They noted in the report, however, there was an unusually high level of uncertainty surrounding consensus expectations for the economic trends in 2023.
On the one hand, a “soft landing” scenario, where a recession is avoided, business confidence is restored and consumer spending rebounds could be detrimental to gold and benefit risk assets, according to the report.
On the other hand, under a severe recession scenario, inflationary pressures would remain elevated as geopolitical tensions spike, and “hypervigilant central banks risk overtightening, given the lag of policy transmission in the economy,” according to the report.
That would all result in a combination of a more severe economic fallout and persistent inflation, known as stagflation. These conditions would result in a hit to both business confidence and profitability, which would lead to layoffs, driving unemployment materially higher, the report said. Gold has traditionally responded well to a stagflationary, or much more severe, recessionary environment, putting stock prices under pressure and driving up safe-haven demand for gold.
All in all, with inflation becoming tamer, the US dollar losing ground and the end of rate increases in sight, the stage seems to be set for a better gold performance in 2023 than in most of last year.
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