Gold Can Already Smell 2023… and It Smells Bullish

According to the World Gold Council, gold will have a stable but positive performance in 2023 - with greater upside than downside potential.

The season for 2023 forecasts has begun! As always, December and January are full of price predictions for the next year. We will, of course, join the fun and publish our own outlook later this month. Today, let’s analyze the World Gold Council’s gold outlook for 2023, “The global economy at a crossroads”.

According to the WGC, the key factors that will shape the gold market in 2023 are as follows: a mild recession, receding inflation, weakening of the dollar, geopolitical flare-ups, improving Chinese GDP growth. an increase in consumer demand for gold, high but not-too-high bond yields, slowing economy and downward pressure on commodities. Because of this set of drivers, gold is said to have a stable but positive performance in 2023.

I disagree with the relevance of some factors listed above. For me, geopolitical risks, consumer demand, and trends in the commodity market are not important drivers determining the price of gold, so I would cross them off the list.

However, I totally agree that inflation should soften next year, which could prompt the Fed to slow the pace of its hike, then pause, and finally reverse its monetary stance. Such a change could indeed weaken the dollar and boost gold and silver prices.

Actually, on one issue, I’m even more bullish than the WGC itself. Although it points out that there is greater upside potential for gold than downside risk, the base scenario of the WGC is a mild recession. It’s very difficult at this point to predict the scope of the upcoming downturn, but – given the level of inflation, the steep hikes in the federal funds rate, the size of the inversion of the yield curve, and the size of asset bubbles that fed on the long period of ultra-low interest rates (think about stocks or cryptocurrencies) – I bet that the recession could be anything but mild.

Implications for Gold

Please take a look at the chart below. As you can see, the price of gold has recently rebounded to almost $1,800. Of course, it may be just a bull trap in a downward trend, but what’s more likely for me is that gold simply started to smell the Fed’s pivot and recession.

After all, the Bank of Canada has already slowed down its pace of interest rates hikes, while the UK has already entered a recession that would last until the end of next year, according to the Bank of England. And, according to the IMF’s October outlook, “more than a third of the global economy will contract this year or next” and “the worst is yet to come and for many people, 2023 will feel like a recession.” Yuck. Something is rotten in the state of Denmark, and gold feels this stink.

Arkadiusz Sieron, PhD