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Gold faces both headwinds, tailwinds in 2023: WGC

A mild recession and weaker earnings are generally more positive for gold, as is the weakening of the dollar as inflation recedes

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For gold, 2023 holds both headwinds and tailwinds in the emerging backdrop of a global economy entering an inflection point after being bedevilled by various shocks over the past year.

Going forward, interplay between inflation and intervention by central banks will be the key in determining the outlook for 2023 and gold’s performance, Juan Carlos Artigas, World Gold Council’s global head of research, observes in 2023 Gold Market Outlook.

A mild recession and weaker earnings are generally more positive for gold, as is the weakening of the dollar as inflation recedes.

“Additionally, geopolitical flare-ups could continue to make gold a valuable tail risk hedge,” analysts at WGC said.

The precious metal’s performance is likely to remain stable in 2023 as it battles against competing challenges from different demand drivers, said the report.

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 a dual-asset,” WGC said.

Chinese economic growth should improve next year, which means boosted consumer gold demand, the WGC points out.

“Pressure on commodities owing to a slowing economy, however, may provide headwinds to gold in the first half of the year. 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,” said the report.

ING's commodities strategist Ewa Manthey believes that gold is still in danger of falling lower and giving up its recent gains, but the longer-term outlook is more constructive as the Federal Reserve shifts from tightening to easing next year. But looking into next year, things begin to shift for the precious metal, which has been battered down by this year's strong dollar and higher yields.

“Gold has been seeing head-turning gains in November and the beginning of December, but the rally has a high chance of fizzling out as the US central bank is still raising rates,” said Manthey.

"We expect gold to remain on a downward trend during the Fed's ongoing tightening cycle," Manthey said in the Dutch bank's outlook for 2023.

According to WGC, 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 biggest shock to the global economy was induced by central banks as they stepped up their aggressive fight against inflation. Equally, the WGC states, central banks abruptly reversing course by halting or reversing hikes before inflation is controlled could leave the global economy teetering close to stagflation. The council highlights that gold has historically responded positively to these environments.

However, a soft landing, albeit less likely to happen, that avoids recession could be detrimental to gold and benefit risk assets.

Global gross domestic product is set to rise by just 2.1 per cent in 2023, which, excluding the global financial crisis in 2008-09 and Covid-19, would mark the slowest pace of global growth in four decades, and meet the criteria of a global recession.

— issacjohn@khaleejtimes.com

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