Economic consensus calls for weaker global growth akin to a short, possibly localized recession, falling – yet elevated – inflation, and the end of rate hikes in most developed markets.

While this environment may carry both headwinds and tailwinds for bullion, on balance, the mixed set of influences implies “a stable but positive performance for gold,” the WGC says in its 2023 outlook.

Due to the speed and aggressiveness of hiking moves by central banks, there are now many signs of weakening economic output across geographies, and economists are warning of a material recession risk.

Meanwhile, it is almost inevitable that inflation will drop next year as further declines in commodities drag down energy and food prices.

The policy trade-off for nearly every central bank, according to the WGC, is now particularly challenging as the prospect of slower growth collides with elevated, albeit declining inflation. 

“No central bank will want to lose its grip on inflationary expectations resulting in a strong bias towards inflation fighting over growth preservation. As a result, we expect monetary policy to remain tight until at least mid-year,” the WGC predicts.

A challenging combination of reduced but still elevated inflation and softening growth demands vigilance from investors. The likelihood of recession in major markets threatens to extend the poor performance of equities and corporate bonds seen in 2022.

Gold, on the other hand, could provide protection, as it typically fares well during recessions, delivering positive returns in five out of the last seven recession.

Furthermore, the WGC believes recession is not a prerequisite for gold to perform. A sharp retrenchment in growth is sufficient for gold to do well, particularly if inflation is also high or rising, it says.

Also supporting gold is the recent decline in the US dollar, which is likely to be pressured further next year particularly as falling inflation and slower growth take hold. According to WGC data, a dollar peak has historically been good for gold, yielding positive gold returns 80% of the time 12 months after the peak.

Other gold-positive influences mentioned in the WGC’s report include geopolitical risks, which should continue to make gold a valuable tail risk hedge; Chinese economic growth, which should improve next year, further boosting consumer gold demand; and long-term bond yields, which are likely to remain high, but a levels that have not hampered gold historically.

That said, there is an unusually high level of uncertainty surrounding consensus expectations for 2023, the WGC cautions.

For example, central banks tightening more than is necessary could result in a more severe and widespread downturn. Equally, central banks abruptly reversing course – halting or reversing hikes before inflation is controlled – could leave the global economy teetering close to stagflation. Gold has historically responded positively to these environments.

On the flipside, a less likely ‘soft landing’ that avoids recession could be detrimental to gold and benefit risk assets, the WGC says.

To access the Gold Outlook 2023 report, click here.