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World Gold Council: The global economy is at an inflection point after being hit by various shocks over the 2022 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.
Economic consensus calls for weaker global growth akin to a short, possibly localized 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, our 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 demand.
Geopolitical flare-ups should continue to make gold as risk hedge.
Chinese economic growth should improve next year, boosting consumer gold demand.
Long-term bond yields are likely to remain high but a levels that have not hampered gold historically.
Pressure on commodities due to a slowing economy is likely to provide headwinds to gold in H1.
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.
Macroeconomic implications for gold
Gold is both a consumer good and an investible asset. As such, World Gold Council analysis shows that its performance is driven by four key factors and their interactions:
Economic expansion – positive for consumption
Risk and uncertainty – positive for investment
Opportunity cost – negative for investment
Momentum – contingent on price and positioning.
These factors, in turn, are influenced by key economic variables such as GDP, inflation, interest rates, the US dollar, and the behavior of competing financial assets.
If you ask our recommendations, they remain unchanged – gold is a long-term investment and there is nothing more sensible than gradually adding gold to your investment portfolio. So you will reduce the average cost of acquiring gold, which will only work in the future.