Despite an “unusually high level of uncertainty” surrounding consensus expectations for 2023, on balance, a “mixed set of influences implies a stable but positive performance for gold,” the World Gold Council states in its Gold Outlook 2023: The global economy at a crossroads.
In an environment where there are headwinds and tailwinds for gold based on an outlook of weaker global growth and a short recession; “falling—yet elevated” inflation; and “the end of rate hikes in most developed countries,” the World Gold Council concludes that a mild recession, and weaker earnings, have been positive for gold historically, and a further weakening of the US dollar as inflation abates could support gold prices.
The report also forecasts that economic growth in China should improve next year, which would boost consumer demand for the precious metal, and predicts yields on long-term bonds will “likely remain high but at levels that have not hampered gold historically.”
Finally, geopolitical flare-ups “should continue to make gold a valuable tail risk hedge.”
Nevertheless, it cautions, “a less likely ‘soft landing’ that avoids recession could be detrimental to gold and benefit risk assets.” And a slowing economy will continue to put pressure on commodities in the first half of next year, presenting headwinds to gold.
Drilling down into the various scenarios, the WGC reasons that gold has delivered “positive returns” in five out of the last seven recessions, and a “sharp retrenchment in growth is sufficient for gold to do well, particularly if inflation is also high or rising.”
In terms of the US dollar, it notes, “a dollar peak has historically been good for gold, yielding positive gold returns 80% of the time.” And when it comes to geopolitical risk, the World Gold Council attributes “a large proportion of gold’s resilience in 2022 to a geopolitical risk premium, with gold’s return not fully explained by its historically important drivers.”
In China, growth will improve, the report argues, as there are signs of easing restrictions around Covid, and regulators show signs of supporting the local property market, “including credit extension to developers and loosening of home-buyer restrictions.” These stimulus measures, the report concludes, “may help stabilize real estate investment and housing demand and encourage an upturn in consumer demand.”