Full year outlook
In December we published our 2023 Gold Outlook. The data for Q4’22 – and, where available y-t-d – remains consistent with the central scenario in the outlook and has not altered our view of a good year for gold with more upside potential than downside risk given a growing risk of recession in the US and Europe.
Investment: upside likely in 2023
A lacklustre 2022 for ETF and OTC demand is likely to set the stage for a year of growth in investment. Gold’s stable performance in 2022, despite strong headwinds from rising rates and a strong dollar for most of the year, has reignited investor interest. As investors have settled the likely peak level of interest rates, rate hikes will pose less of a problem. In addition, continued weakness in the US dollar, growing recession risks, a continued high bond-equity correlation and elevated geopolitical risk form the backbone of a positive tactical case for gold in 2023, in our view.
Inflation is likely to continue to fall in 2023. But we see this as more of a headwind for retail bar and coin than institutional investment demand. As we noted in the last GDT, scant access to alternative inflation hedges drove strong demand for gold in many Asian and Middle East economies in 2022. Should inflation fall, then some slowdown in demand should be expected. What we do not expect is an unwind, as retail demand for gold tends to be sticky.
Fabrication demand: 2023 demand to capitalise on a resilient but low 2022
Jewellery demand is likely to capitalise on a resilient 2022, driven primarily by the reopening of China. An economic rebound, pent-up demand and a flat local price should see demand in line with levels in 2016 to 2018. However, a lacklustre post-COVID response similar to that experienced in the West – where equally pent-up spending on other goods and services took precedence over gold – remains a risk, as do further COVID spikes. In addition, the possibility of a more severe economic slowdown in other regions could offset some of the anticipated Chinese demand strength.
In contrast, a weak Q4 and an anecdotally poor start to 2023 suggests Indian jewellery demand won’t match the expected growth in China. A higher number of auspicious wedding days (67 in 2023 vs 55 in 2022) and higher market prices of Kharif crops 1 should be supportive, but a higher local price and persistent rural inflation might prevent some buying.
The outlook for technology demand in 2023 remains poor as sanctions on China and faltering consumer demand continue to weigh on the electronics sector. In addition, the recession risks materialising in Europe and the US will further curtail demand in discretionary goods spending. However, inventory adjustments are projected to continue across the industry and this may provide some support for demand towards the end of the year.
Central banks: matching 2022 will be a tall order.
Central bank demand remains difficult to forecast partly because it can be policy driven and does not always respond to the most common economic drivers we use to analyse other sectors. In addition, discretionary reporting of holdings, often with a lag, suggests a strong possibility for surprises. But a slowing of growth in total reserves is likely to put pressure on some central banks, reducing their capacity to allocate to gold. We therefore think it likely that 2023 buying will be more moderate.
Supply: mine production has the potential for good growth again in 2023
Output from across the Americas, led by expansion of existing projects in North America, is likely to result in higher in 2023 production, perhaps surpassing the previous high in 2018.
A higher local price in dominant recycling regions in 2022 did not elicit the rise in recycling that models might have suggested. But prior to the year-end rally, gold was lower for several months, curtailing some price-related recycling. High inflation also likely prompted some to hang on to their gold. An expected fall in inflation next year alongside a high recession risk, raises the possibility that both inflation- and distress-related selling will edge up during 2023.