Over the first half of 2023, gold prices increased 5.4 per cent (USD terms), closing June at US$1,912 per ounce (AU$2,882).
Gold outperformed other key asset classes with the exception of global equities, which rallied 23 per cent (AUD adjusted) over the 2022–23 financial year.
The surge in gold prices was driven by a slowdown in monetary policy tightening cycles and fears of a harder landing from inflationary heights — sparked by banking stress in the US and Europe.
According to the World Gold Council’s mid-year outlook, the gold rally could persist if recession fears materialise.
“If the recession risk increases, gold investment could see greater upside,” the report noted.
Observers, including the Federal Reserve, have flagged risks of a looming credit crunch, which could trigger a rise in debt defaults as borrowers feel the full effects of aggressive monetary policy tightening.
“Historically, such periods have resulted in higher volatility, significant stock market pullbacks, and an overall appetite for high-quality, liquid assets such as gold,” the World Gold Council added.
Gold prices surged to near-record highs during the global financial crisis, hitting a peak of US$2,009 (AU$3,030) per ounce, before rallying again to a peak of US$2,036 (AU$3,069) per ounce during the COVID-19 pandemic-induced downturn.
However, the World Gold Council’s base case is for a mild recession, resulting in relatively stable gold prices or a potential contraction.
“Should the expected mild US contraction materialise, the strong first half for gold is likely to give way to a more neutral H2,” the report stated.
“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.”
However, if the world’s central banks extend their monetary policy tightening cycles, gold prices could face a steeper correction.
The achievement of a soft landing may also weaken gold prices as investors favour riskier asset classes.
But ultimately, the World Gold Council backed gold allocation as a hedge against continued macroeconomic uncertainty.
“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,” the council concluded.
Investor behaviour in the gold markets suggests sentiment is skewed towards a macroeconomic scenario involving a correction in gold prices.
Global physically-backed gold ETFs reported net outflows in the last month of the 2022–23 financial year — breaking a three-month streak of positive inflows.
According to the World Gold Council, collective holdings of global gold ETFs dropped by 56 tonnes to 3,422 tonnes, while total assets under management (AUM) slipped 4 per cent to US$211 billion (AU$318 billion).
“The early June strong equity market performance in key markets likely shifted focus away from risk-off assets such as gold,” the report noted.
“And the majority of outflows occurred when the gold price dropped during the second half of the month amid hawkishness from major central banks in the face of obstinate inflationary pressure.”