By K Raveendran
2023 may well be a year of gold. This is because despite several negatives the yellow metal has outperformed everything else. And with the New Year expected to unravel all that traditionally has worked in favour of gold, this asset class appears to be non-stoppable right now.
IMF has warned that a third of the global economy is likely to fall into recession this year. Eurozone and Britain have already shown signs of such a crisis. And this is very much the likely scenario in the United States. Stock markets have already seen a blood bath and further falls are indicated in the days to come. Central banks persisting with their tightening plans and more uncertainties are staring at the world as it descends deeper into recession. These are conditions that gold feasts on.
There were a series of negatives for gold, specifically, in 2022. Fed raised rates at the second most aggressive pace last year; the US dollar index surged 30 percent in 17 months. Most significantly, the rise in the US dollar and real interest rates was much greater than that recorded for 2013 and even larger than in 2008, the year when global financial crisis struck hard. But last year gold declined only 19 percent compared to 30 percent and 34 percent in 2008 and 2013 respectively.
Gold enthusiasts revel at the performance of gold despite strong bearish fundamentals and aver that the yellow metal is only roughly 10 percent away from its historical high despite heavy headwinds of the past nine months and nothing seems to be capable of stopping it from breaking out to a new all-time high. That would be the most remarkable breakout in half a century’s time.
The World Gold Council notes in its outlook for 2023 that the global economy is at an inflection point after being hit by various shocks over the past year and going forward, this interplay between inflation and central-bank intervention will be key in determining the outlook for gold’s performance.
The council cites economic consensus that 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. The environment carries both headwinds and tailwinds for gold. It notes that a mild recession, coupled with weaker earnings, has historically been gold-positive while further weakening of the dollar as inflation recedes could also provide support for gold. Additionally, geopolitical flare-ups should continue to make gold a valuable tail risk hedge. Also, a likely improvement in Chinese economic growth should boost consumer gold demand.
Elaborating on the bumpy economic ride ahead, the council warns about many signs of weakening output due to the speed and aggressiveness of hiking moves by central banks, with consensus forecasts putting global GDP to rise by just 2.1 percent this year. Excluding the global financial crisis and Covid, this would mark the slowest pace of global growth in four decades and meet the IMF’s previous definition of a global recession – i.e. growth below 2.5 percent.
The council lists four key factors which will have a bearing on gold’s performance, at least two of which are positive for the metal. These include economic expansion, which is positive form the point of view of consumption and risk and uncertainty, both of which are positive for investment in gold. The other factors are opportunity cost, which is negative for investment and momentum, which is contingent on price and positioning.
It has been found that gold typically does well during times of recession. Delivering positive returns during five of the seven recessions in the past. A sharp retrenchment in growth is sufficient for gold to do well, particularly if inflation is also high or rising. A dollar peak has historically been good for gold, yielding positive gold returns 80 percent of the time.
The council’s latest Gold Demand Trends report reveals that gold demand in the third quarter of 2022 hit 1,181 tonnes, up 28 percent year-on-year. Strong demand pushed the year-to-date total to its pre-Covid levels. Gold demand was bolstered by consumers and central banks, although there was a notable contraction in investment demand.
Jewellery consumption continued to rebound and is now back to pre-pandemic levels, reaching 523 tonnes, 10 percent higher compared to the third quarter of 2021. Much of this growth was spearheaded by India’s urban consumers who drove up demand 17 percent to 146 tonnes. Similarly impressive growth was also seen in much of the Middle East, with Saudi Arabian jewellery consumption up 20 percent since the third quarter of 2021, and United Arab Emirates up 30 percent for the same period. Chinese jewellery demand also saw a modest 5 percent increase, driven by improved consumer confidence and a dip in the local gold price, prompting the release of some pent-up demand. (IPA Service)