Gold’s performance is likely to remain stable next year as it battles against competing challenges from different demand drivers, said the World Gold Council’s (WGC) 2023 Gold Market Outlook.

 

With the significant chance of a more severe and widespread recession looming large gold is expected to perform well against the baseline expectation.

 

“As the last few years have demonstrated, unexpected geopolitical events can strengthen gold investment demand, as we saw in Q1 this year. We expect consumer gold demand in China to rebound to 2021 levels, supporting overall gold demand and highlighting its role as dual-asset,” WGC said.

 

Safe-haven demand

A short and possibly localised recession could also show signs of stagflation with falling growth and rising unemployment amid high inflation. This would be a negative scenario for equity markets with earnings hit hard and could drive greater safe-haven demand for gold, it said.

 

The global economy is at an inflection point after being hit by various shocks over the past year. The biggest was induced by central banks as they stepped up their aggressive fight against inflation.

 

Going forward, this interplay between inflation and central-bank intervention will be key in determining the outlook for 2023 and gold’s performance.

 

Key takeaways

Economic consensus calls for weaker global growth akin to a short, possibly localised recession; falling – yet elevated – inflation; and the end of rate hikes in most developed markets. In this environment which carries both headwinds and tailwinds for gold, WGC’s key take-aways are:

• A mild recession and weaker earnings have historically been gold-positive;

• Further weakening of the dollar as inflation recedes could provide support for gold;

• Geopolitical flare-ups should continue to make gold a valuable tail risk hedge;

• Chinese economic growth should improve next year, boosting consumer gold demand;

• Long-term bond yields are likely to remain high but at levels that have not hampered gold historically; and

• Pressure on commodities due to a slowing economy is likely to provide headwinds to gold in H1.

 

Positive performance

On balance, this mixed set of influences implies a stable but positive performance for gold.

 

That said, there is an unusually high level of uncertainty surrounding consensus expectations for 2023. 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. On the flipside, a less likely ‘soft landing’ that avoids recession could be detrimental to gold and benefit risk assets.-- TradeArabia News Service