Recently, the World Gold Council published the report, Gold mid-year outlook 2023-Between a soft and a hard place! According to the report, developed market central banks are nearing the end of their tightening cycles. For now, market consensus points to a mild contraction in the US in late 2023 and slow growth in developed markets.
But given the historical lag between monetary policy and economic performance, investors are wary that a hard landing may be still to come.
In this context and following gold’s positive returns in H1, we expect gold to remain supported on the back of range bound bond yields and a weaker dollar. Gold should experience stronger investment demand if economic conditions deteriorate. Conversely, a soft landing or much tighter monetary policy could result in disinvestment.
In summary, the report said, should the expected mild US contraction materialise, the strong first half for gold is likely to give way to a more neutral H2. In this scenario, gold would draw support from a weaker US dollar and stable bond yields, although this would be met by downward pressure from cooling inflation. If history is a guide, monetary policy hold cycles tend to spell a higher-than-average monthly return for gold.
A more positive gold environment would result from a more pronounced economic downturn, thanks to an accompanying increase in volatility and risk-off appetite. Conversely, gold would face challenges if tightening continues for longer than expected. Similarly, if a soft landing were engineered, it would favour risk-on assets and a stronger US dollar, likely resulting in gold disinvestment.
However, given the inherent uncertainty in predicting the global macroeconomic outcome, we believe that gold’s positive asymmetrical performance can be a valuable component to investors’ asset allocation toolkit.
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