• World Gold Council says prices for gold should be rangebound if ‘base case scenario’ of rate rise hold with mild recession comes to fruition
  • Gold tends to outperform its average in periods when the US Fed puts rate rises on hold
  • Gold could drop if rate hikes are more aggressive than expected and we see a soft landing for the economy

Two of the three macroeconomic scenarios facing the global economy should be supportive for gold prices, according to a new outlook from the World Gold Council.

Gold has been one of the top performing major asset classes in 2023, with only developed market equities including the rampaging tech-heavy S&P 500 outpacing the precious metal.

Through the first half of the year, bullion was up 5.4% in US dollar terms to US$1912/oz or 7.3% in Australian dollar terms, propelled by a volatile March which saw a number of small US and European banks collapse or get bailed out.

That event provided a fertile environment for gold to put its safe haven Superman cloak on, even if it quickly got tucked back in the closet.

Now the WGC reckons three things could happen. Two of those scenarios are bullish for gold prices.

The most likely, base case, would see interest rate rises put on hold as a mild recession sits in, the second would be a massive rise in investment demand if economic conditions globally deteriorate.

A third, less likely, scenario with a soft landing and escalation of monetary tightening would probably see gold investment demand fade.

“I’d say one of them we’d probably call our base case, which is the consensus view among most analysts out there on where we’re heading in the macroeconomic and rates environment,” WGC head of Asia-Pacific (ex-China) and global head of central banks Shaokai Fan said.

“Which is the (US) Fed and other major central banks moving into more of a holding pattern and the possibility of a mild recession later this year or earlier next year.

“And in that case, we see gold being supported but the price being more or less range bound.”


ETFs volatile but central banks still batty for bullion

The WGC says in environments like its base case, gold tends to exceed its own long-term performance. It says the combination of stock market volatility and geopolitical and financial crises or ‘event risk’ are likely to keep hedging strategies like gold buying popular.

“Further, based on market consensus expectations, slightly lower interest rates and a weakening US dollar will help gold by reducing its opportunity cost for investors,” the WGC said in its second half outlook report.

“This is consistent with the three previous hold cycles, which have lasted between six and 12 months. During these periods, gold had an average monthly return of 0.7% – equivalent to an 8.4% annualised return – and above its long-term performance.

“As we have discussed in the past, this generally happens because gold is influenced by
bond yields rather than actual policy rates, as the former include market expectations of future policy decisions and the likelihood of a subsequent recession.”

Two of the largest investment markets for gold are in ETFs and central bank buying.

ETFs have been volatile, largely tracking the movements in the gold price with net inflows during gold’s run to over US$2000/oz in March and April and institutional buyers selling out of ETFs in January-February and June.

Central bank buying, on the other hand, continues to be strong.

Fan said while one of last year’s big buyers Turkey has pulled back, largely distributing its bullion into the local investment market, China, Singapore and Poland have shown interest from central banks remains strong after hitting a record level in 2022.

“China continues to report monthly purchases of gold. The MAS in Singapore just bought four tonnes of gold last month, after a one month pause,” he said.

“And we’ve also seen Poland returning to gold buying, I think they bought 15 or 20 tonnes in the last month or so.

“Their governor about a year or so ago said that he has plans to increase gold reserves by 100 tonnes.

“This may may be the beginning of that, we’re not sure, but certainly Poland is back on the buying side too, also Iraq bought some gold last month as well.

“So overall, central banks are quite strong in terms of gold buying, and we expect them to be net buyers for the remainder of the year as well.”

On the retail and consumer side, Fan said the WGC was closely watching jewellery demand in India with wedding season approaching after high prices prompted lower demand from that sector in the first quarter.


Where are equities headed?

The WGC doesn’t comment on gold stocks at all, but it is interesting to note the link between Aussie equities and price movements.

Since this time 12 months ago the All Ordinaries Gold Sub-Index is up 39.63%, with the sub-index 15.44% higher year to date.

That’s against a rise of just 3.22% for the All Ords.

Gold price is one factor for miners. Just as big is costs and hedges, which can hamstring producers if they get caught out by a sudden rise in inflation and gold prices and find themselves out of the money.

This week Goldman Sachs said it saw margins for six gold miners entering its coverage universe lifting over $300/oz by 2025, predicting a perfect storm of higher prices, stabilising inflationary pressure and hedge book roll offs.