By Yusuf Khan


How central banks respond to falling yet high inflation rates is likely to be key for gold prices in 2023, with the precious metal likely to restore its value as a hedge against economic strife, according to a new report from the World Gold Council.

Rising inflation rates and higher interest rates in response from central banks was the biggest driver of gold prices this year, and this "interplay" is likely to be key again in 2023, the WGC said Thursday.

The WGC said that the economic consensus is that in the coming year, weaker global economic growth is likely with the possibility of small localized recessions.

"Consensus forecasts now expect global GDP to rise by just 2.1% next year. Excluding the global financial crisis and Covid-19, this would mark the slowest pace of global growth in four decades and meet the IMF's previous definition of a global recession," the WGC said.

This, on top of elevated inflation levels, is likely to provide a mixed outlook for gold--with both head and tailwinds present.

In terms of tailwinds, mild recessions have historically been positive for gold, while a tapering of interest hikes would likely result in a weaker dollar, further adding impetus for the yellow metal. To add to this, geopolitical flare ups and a re-opening of China should bring further demand for physical gold too.

That said, pressure on all commodities from a slowing economy is likely to weigh on gold in the first half of next year, the WGC said. Likewise, if central banks tighten monetary policy more than expected, gold is likely to face further headwinds.

The WGC added that a soft landing that avoids recession would likely benefit risk assets like equities and LME metals, while gold as a risk-hedge would likely face further pressure.

"A lot has been written about the traditional 60-40 portfolio having a tough time this year but for those investors who have had gold in their portfolios have fared better," said Juan Carlos Artigas, global head of research at the WGC, in a call. "Those investors have seen better returns, less volatility and fewer losses and gold can play an integral complementary role in different scenarios."

Nymex gold for the year is down 1.8%. However, the yellow metal has performed well within the last quarter, up 7.5%. By contrast, the S&P 500 is down 17.6% year-to-date.

Mr. Artigas said that investors were currently more worried about risk to the downside and were looking to mitigate against that should a more severe recession hit in 2023, especially in western markets.

"Gold may have a stable but positive performance in 2023," he added.


Write to Yusuf Khan at yusuf.khan@wsj.com


(END) Dow Jones Newswires

12-08-22 0314ET