Developed market central banks are nearing the end of their tightening cycles, suggesting a shift in the macroeconomic climate, according to the World Gold Council’s Gold mid-year outlook 2023.
Market consensus currently indicates a mild contraction in the U.S. late this year, with slow growth expected in other developed markets.
Following gold's positive returns in H1, investors have good reason to anticipate that gold will remain robust against rangebound bond yields and a potentially weaker dollar.
Gold's demand could rise in the face of deteriorating economic conditions. However, a softer landing or prolonged tightening of monetary policy may prompt disinvestment.
Gold ended the first half of the year on a high note, with a 5.4% increase in USD, closing June at US$1,912.25/oz. Apart from developed market stocks, gold outperformed all other major assets, adding positive returns to investor portfolios and helping to curb volatility during the mini-banking crisis in March. A stable US dollar, event risk hedging, and continued central bank demand largely drove gold’s strong performance.
An era of tightening comes to a close
June saw interest rate hikes by the European Central Bank (ECB) and the Bank of England (BoE), whereas the US Federal Reserve maintained its target rate to let the effects of the tightening cycle permeate the real economy. US bond market participants anticipate another hike this year, probably in July, before a sustained 'hold' period. As the ECB and the BoE are expected to further hike target rates, the market is gearing up for the cycle's end by the close of the year.
As this transition from tightening to holding takes place, market consensus predicts a slight contraction in the US and sluggish growth in other developed markets.
Anticipated trends in gold performance
Given this scenario, the Gold Council’s analysis suggests that gold will likely remain resilient in 2023, bolstered by its impressive H1 performance. However, it may not significantly deviate from the range observed so far this year due to the key drivers of gold's performance: economic expansion, risk, opportunity cost and momentum.
Despite potential dips in consumer spending due to slow growth in Western economies, the Gold Council anticipates that the Indian economy's resilience and potential economic stimuli in China will bolster local demand.
Potential upsides and downsides
A heightened recession risk could push gold investment higher, given its historical tendency to thrive in high volatility periods, stock market pullbacks, and overall preference for high-quality, liquid assets like gold. Conversely, if a soft landing is achieved with tight monetary policy, it could create headwinds for gold and result in disinvestment.
Gold's positive H1 performance means that disinvestment would need to be substantial to pull the average 2023 gold price below its 2022 average of US$1,800/oz.
Conclusion
If the expected mild US contraction materialises, gold's strong H1 performance may give way to a more neutral H2. In this scenario, a weaker US dollar and stable bond yields would likely support gold, despite potential downward pressure from cooling inflation. Historically, monetary policy hold cycles have resulted in higher-than-average monthly returns for gold.
A more positive environment for gold could emerge from a pronounced economic downturn, fuelled by increased volatility and risk aversion. However, if tightening persists longer than anticipated or a soft landing is achieved, risk-on assets and a stronger US dollar could prompt gold disinvestment.
Given the inherent unpredictability of global macroeconomic outcomes, the positive asymmetrical performance of gold could serve as a valuable addition to investors' asset allocation toolkit.