2023 review

  • Emerging market (EM) demand for gold provided not only a ballast to lacklustre developed market (DM) activity but also helped drive gold prices to record highs
  • Central bank demand, primarily from EM institutions, was a significant contributor: we estimate this added up to 15% to gold’s annual performance
  • Bond yields, despite hitting a 15-year high in October, were only a small drag as they made a round trip to end the year roughly where they started.

Looking forward

  • Geopolitical risks continue to bubble in the Middle East adding to near-term inflationary risks
  • January tends to exhibit seasonal strength. The jury is out on whether recent price records deter or encourage investment. So far so good.
  • A recent speculative focal shift to the 2-year Treasury yield suggests that markets may have gotten ahead of themselves after the December Fed meeting.

EM inflows mop up DM outflows 

Gold prices rose 15% in 2023 to reach US$2,078/oz, the highest annual close on record1. The closing price was also a daily record and was mirrored in all but one currency (Table 1). Gold also ended the year as one of the best performing assets. According to (GRAM), the influential drivers of gold’s return in 2023 were central banks, geopolitics, interest rates and gold’s previous (lagged) monthly return (Chart 1).  

We estimate that central banks contributed between 10 and 15%. As not all central bank buying is observable at a contemporaneous monthly frequency, we rely on two factors within our model to infer central bank impact: the constant (economic expansion) and the portion that is unexplained. Prior to 2022, the constant was c.4%; we believe central bank net buying has been a strong contender for driving that up to almost 8% since then. In addition, the unexplained portion of returns totalled 12% in 2023. If we attribute the change in the constant and all of the residual to central banks we reach a figure of 17%. A variation of GRAM in which Brent crude oil is replaced with the Geopolitical Risk Index (GPR) gives us 13%, so we settle on a figure between 10 and 15%, partly as we can’t rule out surprisingly resilient retail demand as an additional contributor.


Chart 1: Central banks and geopolitics help drive gold to new highs*


GMC December 2023: Chart 1

Sources: Bloomberg, World Gold Council; Disclaimer

*Data to 31 December 2023. Our Gold Return Attribution Model (GRAM) is a multiple regression model of monthly gold price returns, which we group into four key thematic driver categories of gold’s performance: economic expansion, risk & uncertainty, opportunity cost, and momentum. These themes capture motives behind gold demand; most importantly, investment demand, which is considered the marginal driver of gold price returns in the short run. ‘Unexplained’ represents the percentage change in the gold price that is not explained by factors currently included in the model. Results shown here are based on analysis covering an estimation period from February 2007 to December 2023.


Table 1: Record high set in all but one currency (CHF) in 2023

 USD (oz)EUR (oz)JPY (g)GBP (oz)CAD (oz)CHF (oz)INR (10g)RMB (g)TRY (oz)AUD (oz)
28 December 2023 price2.0781,8879,4371,6322,7471,74853,57847561,2113,036
December return2.1%0.4%-2.7%1.2%-0.7%-1.9%1.8%1.8%4.2%-1.5%
Y-t-d return14.6%10.8%23.4%8.7%11.7%4.2%15.2%18.1%80.4%14.0%

*Data to 31 December 2023. Based on the LBMA Gold Price PM in USD, expressed in local currencies. Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Elevated geopolitical risk was a key driver in 2023 and is captured by including GPR in our model. This contributed an estimated 5% to returns and mitigated a drag from falling inflation and other risks (-3% contribution).

Interest rates appeared to have had a lower drag on prices than might have been assumed at the start of the year –A round-trip in the 10-year yield (both nominal and real) coupled with central bank buying and generally elevated uncertainty helped gold prices remain somewhat unscathed by volatile opportunity costs. Nominal yields contributed c. -2% to gold’s performance, and if net out the impact of breakeven inflation it suggests the impact of real rates was c.-3%. 

When the monthly impacts are added together, gold’s prior monthly return created a significant cumulative drag in 2023 (-4%). But this could be viewed as a positive volatility-dampening feature of the gold market. It works in reverse too, as we saw between 2013 and 2015.


Chart 2: Self-correcting gold prices contribute to lower relative volatility*


GMC December 2023: Chart 2

Sources: Bloomberg, World Gold Council; Disclaimer

*Monthly data from December 2010 to December 2023. X-axis shows the coefficient for the lagged return of respective asset from a regression of the return of each asset on the its lagged return and the current and lagged return of the US dollar index (DXY). The y-axis shows the annualised volatility over the whole window.

The drag from lagged returns supports the notion that the gold market is populated by price sensitive buyers alongside investors that buy into stronger prices – a feature of gold’s dual nature. We have found this to be the case in both jewellery and bar and coin segments at annual and quarterly frequencies. Central banks may also exhibit price sensitivity, particularly if they are purchasing at regular intervals over a longer period of time-something we’ve witnessed over the last two years. 

Price sensitivity would explain the negative coefficient for lagged returns. And it is a factor that likely reduces gold’s volatility. When we compare gold to other commodities there appears to be a link between the lagged coefficient of the dependent variable and annualised volatility (Chart 2). We have added bitcoin to the analysis to highlight that such a highly speculative asset is likely to have a higher volatility, part of which is driven by increased speculative momentum.  

Looking Forward

Our Gold Outlook 2024 analysed three economic scenarios and their likely effect on gold in 2024. One of these scenarios focused on the consensus view that a soft landing would be engineered in the US and Europe; China’s growth would be soft; inflation risks would abate but longer maturity interest rates would remain stubbornly elevated, and high prices would restrain consumer demand. In this context, gold performance could be lacklustre and any upside may depend on continued central bank demand.


Chart 3: Markets may have gotten ahead of themselves*


GMC December 2023: Chart 3

Sources: Bloomberg, World Gold Council; Disclaimer

*The Fed dot plot (Summary of Economic Projections) vs. market (OIS) expected policy rate one year ahead as of December of the prior year. Data from December 2016 to December 2023.

Financial conditions have eased markedly on the back of the bond market rally but market expectations of policy rate cuts seem excessive (Chart 3) - a concern some Fed officials have voiced since the December meeting2  -and the tensions around the Suez Canal have highlighted how continuing geopolitical factors can have swift inflationary (cost-push) implications. 

Although we still view a material resurgence of inflation as a remote possibility, this scenario would likely be positive for gold, as it undermines monetary policy and risks an even harder landing further down the road.


Chart 4: Gold dances to the 2-year tune when policy uncertainty is high*


GMC December 2023: Chart 4

Sources: Bloomberg, World Gold Council; Disclaimer

*Daily data from March 2016 to December 2023. Correlation calculated on a 200-day rolling window between log return on gold price (US$/oz) and change in bond yield.

In 2023, gold played more to the tune of the 2-year Treasury yield (real and nominal), than the historically more important 10-year yield, something that tends to occur during heightened policy uncertainty (Chart 4). This anomaly diminished during the summer, as peak rates appeared more certain and supply issues focused attention on the back-end of the yield curve. Over the last few weeks, however, it appears we‘ve seen a shift back to monetary policy, perhaps highlighting the perilously narrow path to an economic soft landing.


Moderate start to 2024

Gold was a surprising star in 2023, surging against the odds of rapidly rising interest rates and resilient economies. Central banks are largely to thank for the outperformance, but elevated geopolitical risks likely created investor reticence to give up gold as well as being a key driver of central bank demand. Meanwhile, the rates-driven weakness seen in developed markets, led by European ETF flows, was insufficient to dent gold’s performance.

In the near term, a tug-of-war between historically positive January seasonality and some pushback against the dovish sentiment that drove prices to all-time-highs in December is likely. Equally, there may well be a battle between intermittent inflationary scares (shipping costs) and recessionary impulses (JOLTS hiring), highlighting how perilously narrow the path to an economic soft landing is. 

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