It’s fair to say 2022 was an interesting year for gold. Using the SPDR Gold Shares (NYSEARCA:GLD) as the gauge, the world’s largest gold-backed exchange traded fund finished 2022 lower by just 0.8%.
That’s stellar compared to the 13% shed by Bloomberg US Aggregate Bond Index and the 18.2% lost by the S&P 500. GLD was also significantly less volatile than stocks. Overall, it’s safe to say gold did its job in 2022, but it also likely left clients disappointed because declined alongside stocks and bonds, though to a much lesser extent.
Indeed, gold was something of a 2022 dud because factors that usually support upside for the yellow metal – namely geopolitical strife and rampant inflation – were in place. Experts believe those factors will remain in place in 2023 and that the possibility of a global recession is rising, which could stoke demand for safe-havens such as bullion.
Without the benefit of a crystal ball, knowing what this year has in store for gold is impossible, but expecting some upside isn’t unreasonable.
Good Vibes Could Arrive for Gold
Amid expectations that the Federal Reserve might be able to hold off on rate hikes this year or, at the very least, be less aggressive, there’s belief that rate-sensitive gold could rally.
“The Fed may have broadly achieved its target goal of ‘squashing’ inflation, given the decline in market expectations for US inflation and correction in financial assets. As a result, it seems more likely that the Fed may slow its pace or pause its hiking cycle in the first half of 2023. The gold price declined in response to these shifting interest rate levels, while also closely tracking the decline in inflation expectations,” notes State Street Global Advisors (SSGA), GLD’s issuer.
Another point in favor of gold, albeit much more ominous, is the yellow metal’s historical reputation of proving sturdy against recessionary backdrops.
“With the likelihood of a US recession growing, gold may benefit from investors trying to pivot towards counter-cyclical and defensive portfolio positioning. Gold’s behavior during previous recessionary periods in the US is clearly in favor of the yellow metal. Gold’s performance during other cyclical phases shows that on average, gold also fares well outside of recessions. Gauging leading economic indicators shows that gold has typically done well in three of the four phases of a full economic cycle,” adds SSGA.
Of course, the idea of buying gold in a recession would be further aided if the dollar, another classic safe-haven, declines because commodities are denominated in the U.S. currency.
Big Buyers Still Love Gold
Many clients are apt to view gold as a haven for retail investors and to some extent, that’s accurate. As such, clients may be put off by bullion, but advisors have credible points with which to convince clients the gold market is actually controlled by some high-level participants.
Those include global central banks, which have been dedicated buyers of bullion in recent years. That trend is likely to remain in place this year.
“Global demand for gold in 2022 was strong among key sectors including investments, jewelry, and central banks,” concludes SSGA. “In fact, looking at average quarterly demand for the past five years, the pandemic had a material impact on gold demand, with a quarterly average of 913 metric tons in 2020 compared to the 2018-2019 quarterly average of approximately 1,102 metric tons.”