💡 According to the consensus market forecast, next year there will be a slowdown in economic growth, with some economies predicted to go into recession due to monetary tightening by global central banks. Against this backdrop, inflation is expected to fall, and central banks will end the cycle of raising interest rates and possibly begin to lower them by the end of the year. Consider how gold might behave in such an environment.
The impact of a downturn in the economy
Given the high probability of recession and falling demand in the economy, there are significant risks to the stock market. At the same time, gold can provide returns above other assets. According to historical data, the metal has shown positive dynamics in five of the last seven recessions. The most positive scenario for gold is the onset of a deep recession accompanied by high inflation.
Weakening U.S. dollar
The U.S. currency began correcting in October on expectations of slower inflation and less Fed action. Historically, when the DXY index peaked, gold prices were positive 80% of the time over the next 12 months. At the same time, the average return over that period was about 16%.
The dollar is expected to continue falling in 2023 amid falling inflation and economic growth. In addition, the following factors will be negative for the dollar: reduced pressure on the euro as the EU energy infrastructure strengthens, as well as the deferred effect on currencies from tightening of monetary policy by central banks of developed countries other than the US.
Treasury bond dynamics
Lower real yields in the U.S. are setting a bullish outlook for gold over the next year. Treasury yields are expected to begin a steady decline in Q1, several months ahead of the last Fed rate hike, consistent with the dynamics in previous tightening cycles.
Gold is a proven hedge against geopolitical risks, and the metal has performed this function successfully over the past five years. While macroeconomic factors are central to price dynamics, new geopolitical turmoil could support the metal, as it did in Q1 2022.
China’s economic recovery
Consumer demand for gold in the country is expected to return to 2021 levels. A loosening of the COVID-19 zero tolerance policy, which we are now seeing, could lead to a gradual opening of the economy and stimulate consumer activity and confidence.
The downturn in the commodities market
Despite severe supply constraints in many commodities, the intensification of the recession in the economy will have a negative impact on prices. Pressure is likely to be especially pronounced in the first half of 2023, when the recession in manufacturing and real estate will intensify. Gold could also suffer because it is a large component of the two major commodity indices, the BCOM and S&P GSCI. The correlation coefficient between metal prices and indices over the last 20 years is about 0.44.
💎 We maintain a positive outlook on gold in 2023, given the outlook for the global economy and the Federal Reserve’s monetary policy easing. Nevertheless, we think the metal looks overbought at the moment. Since the beginning of November gold has risen about 11% and has almost completely recovered this year’s fall. We expect that in the nearest future there will be more attractive levels for position forming.