Gold set to sparkle as global recession looms

Reuters/Mohamed Abd El Ghany

• Prices forecast to rise and maybe break records
• Downturn may see investors flock to gold to rebalance portfolios
• Reopening of Chinese market will mark its first gold purchase in 3 years
• Global central banks buying gold at record pace

Gold may have underperformed last year but it is expected to shine in 2023 and could rise as high as $3,000, analysts have said.

The World Gold Council said in its 2023 market outlook that the precious metal is set to record a stable performance next year despite a mix of competing challenges.

“Economists and industry experts forecast gold prices to rise further and test the all-time high of around $2,075,” Vijay Valecha, chief investment officer at Century Financial in Dubai, told AGBI. 

“A breakout above this level could see gold hovering in the range of $2,500 to $3,000. However, if inflation rises and the Fed continues hiking rates aggressively, gold could dip to the crucial support level of $1,700.” 

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Valecha pointed out that gold traditionally performs well during the first quarter and January has proven to be the best month over the last 20 years, yielding an average return of 3.2 percent. 

If the global downturn turns out as expected, investors will flock towards gold for its perceived safety during periods of uncertainty, he added.

Gold did initially perform well in 2022 after the Russia-Ukraine conflict prompted investors to shun riskier assets and turn to safe haven bullion, causing prices to spike.

However, its historical role as an inflation hedge was hit by the strong value of the US dollar, driven by the Federal Reserve’s aggressive interest rate hikes. The outlook in 2023 is more optimistic as numerous external macroeconomic and geopolitical factors spill into the new year.

“Increased demand from central banks, market turbulence and ongoing political tensions in Europe are likely to play pivotal roles in the rise and return of gold as a safe haven asset,” said Aziz Moti, general manager and head of analysis at ISA Bullion in Dubai.

“More specifically, an eventual peak in central bank rates together with the prospect of a weaker dollar and inflationary pressures continuing to overshadow the US economy will play a significant role in the demand, and therefore price of gold in 2023.”

Recession-proof asset

Moti added that the price of gold is likely to be affected by the economic uncertainty engulfing much of the world at present, especially as people grapple with rising household bills, which is likely to continue well into the first half of this year.

“As a result, the price of gold is likely to increase, as investors look to rebalance their portfolios, ensuring their investments are as recession-proof as possible,” he said.

Valecha said gold could also be seen as an affordable option for buyers, as extra supply enters the market. 

“Mined gold supplies are expected to grow by 2 to 2.5 percent in 2023 as Chilean and Canadian projects start to deliver new output,” he said.

“This would enhance dollar-denominated gold’s appeal, making it more affordable for buyers in a recessionary environment.”

He added: “Escalation of geopolitical tensions between Russia and Ukraine would dampen sentiment towards risky assets and enhance gold’s appeal.

Centamin

“Emerging economies and nations facing sanctions could increase bullion holdings in 2023. Russia recently doubled its holding limits of gold within the National Wealth Fund.”

Increased demand from India and China is also expected this year.

“Recession worries could lift the inflation hedge appeal of gold that may support prices,” said Hareesh V Nair, head of commodity research at Geojit Financial Services in Kochi.

“A possible turnaround in physical demand from China after easing pandemic-related lockdowns and a stable jewellery demand in India may also contribute to the trend.”

Century’s Valecha added: “The reopening of the Chinese economy is a major tailwind for gold. 

“The early arrival of the Lunar New Year is further boosting gold prices just as the world’s biggest bullion consumer emerges out of lockdown.”

Central banks boost stocks

Analysts also noted banks have been buying gold at a record pace and are expected to continue doing so alongside a rise in demand.

“Central banks across the world, particularly in Iraq, India, Ireland, Egypt and Turkey, purchased gold at a record pace in 2022,” Valecha said. 

“A recent survey conducted by World Gold Council indicates this momentum is likely to persist in 2023 as 25 percent of central banks are expected to increase gold holdings further.”

ISA Bullion’s Moti added that gold will continue to perform well against other assets, as a looming recession across western European markets is likely to impact growth in the equities market. 

“As such, gold will continue as a key investment for retail and institutional investors alike, as it shields [them] from rising inflation,” Moti said.

Carsten Menke, head of next generation research at Julius Baer in Zurich, sounded a note of caution, however.

“Holdings of physically backed products, our preferred gauges of investment demand, have not recorded any inflows, neither for gold nor for silver,” Menke said.

“While recession risks in the US have risen over the past few months, we still believe that the economy should show modest growth this year.

“All in all, we thus believe that investment demand for gold is unlikely to pick up next year. Instead, we should rather witness a further gradual fading of safe-haven demand, assuming no major economic or geo-political hiccups.”