World Gold Council outlines what’s in store for gold with the global economy at a ‘crossroads’

Over the past year, central banks and, in particular, the Federal Reserve, have “worked to stifle inflation with repeated rate hikes,” said Juan Carlos Artigas, global head of research at the World Gold Council. As a result, the global economy is now at a “crossroads, with consensus pointing to a mild recession in 2023.”

Gold’s performance in the new year will be “shaped by the intertwining effects of economic growth, inflation and monetary policy, with additional support from geopolitics and a likely softening U.S. dollar,” he said in written commentary for MarketWatch.

Economic consensus calls for weaker global growth akin to a “short, possibly localized recession,” with falling — yet elevated — inflation and the end of interest-rate hikes in most developed markets, according to the World Gold Council report.

That mild-recession scenario would likely see both headwinds and tailwinds for gold, including further weakening of the dollar as inflation recedes and geopolitical flare-ups, which could provide support for gold, and an economic slowdown, which may provide headwinds to the metal in the first quarter, it said.

“This mixed set of influences implies a stable but positive performance for gold,” the World Gold Council said.

It also pointed out, however, that there is an “unusually high level of uncertainty surrounding consensus expectations for 2023,” and provided an outlook for gold under two other economic scenarios.

A so-called “soft landing,” where business confidence is restored and spending rebounds, may post downside risks to gold, the World Gold Council said.

A soft landing is a “historically unlikely event,” but gold would “see more headwinds as investors shift their focus to risk-on assets,” Artigas said.

Meanwhile, under a severe recession, inflationary pressures would remain as geopolitical tensions spike, according to the report. “Hypervigilant central banks risk overtightening, given the lag of policy transmission in the economy.”

That would all result in a more severe economic fallout and stagflationary conditions, with the hit to business confidence and profitability likely leading layoffs and driving unemployment materially higher, the report said.

Gold has traditionally performed particularly well in a stagflationary, or much more severe, recessionary environment, “emphasizing its role as a strategic hedge,” said Artigas.