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Gold expected to stay strong for remainder of 2023

The World Gold Council (WGC) expects the yellow metal to hold firm over the rest of 2023, despite some price weakness in the past month and a bit.

The Council says its latest research shows investors should not give up on gold in the second half of the year.

In their half-year review, WGC analysts say they expect gold to remain relatively stable at current prices (above $AU1,900 an ounce) through year-end. Gold was trading around $AU1,915 an ounce this week.

It peaked at $AU2,055 an ounce in early April and started sliding as central bank rate rises continued and started eating away at market confidence. Gold had bottomed out at $AU1,817 an ounce in late February.

Gold outperformed bonds and cash in the first half of this year, and the only thing it hasn’t outperformed was developed economy equities.

The WGC noted that in the first half of the year, gold prices saw a gain of 5.4%. This comes as the S&P 500 has rallied 14% year-to-date. Gold certainly topped the ASX, which could only rise around 1%.

“Gold not only contributed positive returns to investor portfolios, but it also helped dampen volatility throughout H1, especially during the mini-banking crisis in March,” the WGC said in the report.

“It is worth noting, however, that given gold’s positive performance in H1, an investor unwind would need to be severe to result in the average 2023 gold price falling below $AU1,800/oz – its 2022 average,” the WGC said in its report.

“Given the inherent uncertainty in predicting the global macroeconomic outcome, we believe that gold’s positive asymmetrical performance can be a valuable component of investors’ asset allocation toolkit.”

“We expect gold to remain supported on the back of range-bound bond yields and a weaker dollar,” the WGC said in its mid-year report. It noted that gold was a key diversifier against economic strife.

Looking ahead, monetary policy moves from central banks are likely to play a key part in gold’s performance this year, with markets expecting just one more rate hike from the US Federal Reserve, while the European Central Bank and Bank of England are also likely to come to the end of their respective hiking cycles by year-end, the WGC said.

In doing so, the WGC expects slow growth in developed markets, which should support gold, as it normally performs well in a time of crisis.

“Slightly lower interest rates and a weakening US dollar will help gold by reducing its opportunity cost for investors,” the WGC said, adding that gold prices have generally risen when interest rates have been held.

That said, the WGC doesn’t expect a major rally in prices. Under a soft landing scenario—where a recession is avoided (which is what the Fed is pushing for) but monetary policy remains tight—gold may be less attractive than other haven assets, such as treasuries (bonds).

“While slow economic growth in the West may have a negative effect on consumer spending, we anticipate that the Indian economy will hold up better, and China will respond to potential economic stimulus later in the year, providing some support to local demand,” the WGC said.

In addition, despite signs of cooling inflation, the combination of stock market volatility and ‘event risk’ (such as geopolitical or financial crisis) is likely to keep hedging strategies, including gold, in place.

And, of course, investors should look at gold flows in and out of ETFs. They are negative so far in 2023, and at purchases and sales by central banks, led by China, India, and Turkey.