Gold set to shine bright in 2023 as world heads towards recession

• Amid all the uncertainties revolving around central banks fighting elevated inflation by rising interest rates and recession fears, experts see demand for gold remaining intact.
• A report by the World Gold Council (WGC) says that the global economy is at an inflection point after being hit by various shocks over the past year.
• According to the report, a mild recession and weaker earnings have historically been gold-positive.
• A further weakening of the dollar as inflation recedes could provide support for gold.

Economic weakness usually bodes well for gold, as it is seen as a good hedge against risk. Amid all the uncertainties revolving around central banks fighting elevated inflation by interest rate hikes, and recession fears, experts see demand for gold remaining intact in 2023.

According to the World Gold Council (WGC), the global economy is at an inflection point after being hit by various shocks over the past year. “The interplay between inflation and central-bank intervention will be key in determining the outlook for 2023 and gold’s performance,” says the WGC.

For the near term, ICICIdirect says that, “Further, (gold) prices may rise on expectations that the US Fed will stay less aggressive in raising interest rates from this month. MCX Gold prices are likely to surpass the hurdle of ₹54,400 to continue its upward trend towards the level of ₹54,600 in the coming trading session.”

Gold does well in recessions
According to the report, a mild recession and weaker earnings have historically been gold-positive. A further weakening of the dollar as inflation recedes could provide support for gold.

Geopolitical flare-ups should continue to make gold a good risk hedge. Besides, pressure on commodities due to a slowing economy is likely to provide headwinds to gold in H1, says the industry body for the precious metal.

In the last few months, equity markets across the world have been volatile on fears of recession as world central banks have been hawkish to manage inflation.

“Consensus forecasts now expect global GDP to rise by just 2.1% next year. Excluding the global financial crisis and COVID, this would mark the slowest pace of global growth in four decades and meet the IMF’s previous definition of a global recession – i.e. growth below 2.5%,” said WGC.

On December 7, India’s central bank downgraded its GDP growth outlook for FY23 to 6.8% from 7% it had predicted in September this year. This is the second time that the RBI has changed its outlook on how the country’s economy will expand, from 7.2% it had expected during the start of the year.

This came in as RBI increased interest rates by 35 basis points in December, which was the fifth rate hike since May in 2022.

“In the US, markets expect the Fed to start cutting rates in the second half of 2023. Elsewhere, markets expect policy rates to come down more slowly than in the US, but by 2024 most major central banks are expected to be in easing mode,” said WGC.

A mixed set of influences implies a stable but positive performance for gold.

“There is an unusually high level of uncertainty surrounding consensus expectations for 2023. For example, central banks tightening more than is necessary could result in a more severe and widespread downturn. Equally, central banks abruptly reversing course – halting or reversing hikes before inflation is controlled – could leave the global economy teetering close to stagflation. Gold has historically responded positively to these environments,” said the WGC report.

Analysts say next year assets like gold that are used to hedge against market uncertainties will continue to do better.

“Growth equity funds, real estate vehicles and private credit managers have all experienced varying degrees of markdowns on their assets, and more seem likely. On the other hand, other alternative investments such as hedge funds that focus on rates, currencies and cross-asset correlations had a banner year and proved their worth as portfolio diversifiers. In 2023, gold may serve a similar purpose as the dollar and real interest rates find their peaks,” said a report by JP Morgan.


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