Gold Overview

Looking back to 2023, emerging market (EM) demand for gold provided not only a ballast to lack-lustre developed market (DM) activity but also helped drive gold prices to record highs. Central bank demand, primarily from EM institutions, was a significant contributor estimating this added up to 15% to gold’s annual performance. Bond yields, despite hitting a 15 year high in October, were only a small drag as they made a round trip to end the year roughly where they started.

Geopolitical risks continue to bubble in the Middle East adding to near-term inflationary risks. Jan-uary tends to exhibit seasonal strength. The jury is out on whether recent price records deter or encourage investment. A recent speculative focal shift to the 2-year Treasury yield suggests that markets may have gotten ahead of themselves after the December Fed meeting.

Gold prices rose 15% in 2023 to reach US$2,078/oz, the highest annual close on record. The clos-ing price was also a daily record and was mirrored in all but one currency. Gold also ended the year as one of the best performing assets. According to (GRAM), the influential drivers of gold’s return in 2023 were central banks, geopolitics, interest rates and gold’s previous (lagged) monthly return.

It is estimated that banks contributed between 10 and 15%. As not all central bank buying is ob-servable at a contemporaneous monthly frequency, it is relied on two factors within our model to infer central bank impact, the constant (economic expansion) and the portion that is unexplained. Prior to 2022, the constant was c.4%. Central bank net buying has been a strong contender for driving that up to almost 8% since then. In addition, the unexplained portion of returns totalled 12% in 2023. If we attribute the change in the constant and all of the residual to central banks we reach a figure of 17%. A variation of GRAM in which Brent crude oil is replaced with the Geopoliti-cal Risk Index (GPR) gives us 13%, so we settle on a figure between 10 and 15%, partly as we can’t rule out surprisingly resilient retail demand as an additional contributor.

There are three economic scenarios and those are likely to affect gold in 2024. One of these sce-narios focuses on the consensus view that a soft landing would be engineered in the US and Eu-rope; China’s growth would be soft; inflation risks would abate but longer maturity interest rates would remain stubbornly elevated, and high prices would restrain consumer demand. In this con-text, gold performance could be lacklustre and any upside may depend on continued central bank demand.

Financial conditions have eased markedly on the back of the bond market rally but market expec-tations of policy rate cuts seem excessive, a concern some Fed officials have voiced since the De-cember meeting, and the tensions around the Suez Canal have highlighted how continuing geopo-litical factors can have swift inflationary (cost-push) implications.
A material resurgence of inflation might still be a remote possibility which would likely be positive for gold, as it undermines monetary policy and risks an even harder landing further down the road.

In 2023, gold played more to the tune of the 2-year Treasury yield (real and nominal), than the historically more important 10-year yield, something that tends to occur during heightened policy uncertainty. This anomaly diminished during the summer, as peak rates appeared more certain and supply issues focused attention on the back-end of the yield curve. Over the last few weeks, however, it appears we‘ve seen a shift back to monetary policy, perhaps highlighting the perilous-ly narrow path to an economic soft landing.

Gold was a surprising star in 2023, surging against the odds of rapidly rising interest rates and resil-ient economies. Central banks are largely to thank for the outperformance, but elevated geopoliti-cal risks likely created investor reticence to give up gold as well as being a key driver of central bank demand. Meanwhile, the rates-driven weakness seen in developed markets, led by European ETF flows, was insufficient to dent gold’s performance.
In the near term, a tug-of-war between historically positive January seasonality and some pushback against the dovish sentiment that drove prices to all-time-highs in December is likely. Equally, there may well be a battle between intermittent inflationary scares (shipping costs) and recessionary impulses (JOLTS hiring), highlighting how perilously narrow the path to an economic soft landing is.