After gold ended the first half of this year on a positive note, the World Gold Council said it sees potential for a further rise in prices for the precious metal, but it also warned that risks to that outlook persist as questions continue to surround the prospects for the U.S. and global economy.
In its midyear gold outlook report released Thursday, the World Gold Council said the market consensus points to a mild U.S. economic contraction in late 2023, along with slow growth in developed markets, but investors are still wary of the potential for a hard economic landing given the historical lag between monetary policy and economic performance. A hard landing is defined as a rapid downturn in the economy after a period of rapid growth.
Gold should experience “stronger investment demand if economic conditions deteriorate,” it said, noting that an economic deterioration could be driven by a significant increase in defaults following tighter credit conditions or other “unintended consequences” of the high interest-rate environment.
Historically, periods of economic deterioration have led to “higher volatility, significant stock-market pullbacks and an overall appetite for high-quality, liquid assets such as gold,” according to the World Gold Council report.
Gold futures
GC00,
GCQ23,
based on the most active contracts posted a gain of nearly 5.7% for the first half of 2023, but they lost 2.9% in the second quarter, according to Dow Jones Market Data. They settled at $1,927.10 an ounce Wednesday on Comex.
Gold in the first half of the year outperformed “all other major assets apart from developed-market stocks,” according to the World Gold Council report.
The precious metal not only contributed to positive returns to investor portfolios but also helped “dampen volatility” through the first half, especially during the regional-banking crisis in March, against a backdrop of a relatively stable U.S. dollar and interest rates, event risk hedging and continued central-bank demand for gold, it said.
In June, the European Central Bank increased interest rates, and more hikes are expected, while the U.S. Federal Reserve kept its target rate unchanged at its meeting last month but is expected to announce additional rate hikes this year.
Minutes from the Fed’s June meeting released Wednesday show that some central-bank officials pushed for a June rate hike.
Still, there are some expectations that the end of the rate-increase cycle is near, and as monetary policy “likely transitions from tightening to on-hold,” market consensus is for a mild contraction in the U.S. this year, and slow growth in developed markets, the World Gold Council report said. Should that scenario play out, gold may remain supported this year, “but it may not break out significantly from the range we have seen so far this year.”
“‘If a mild economic contraction plays out, then our analysis shows that gold should continue to deliver steady returns in the second half of the year as bond yields remain stable and the U.S. dollar weakens.’”
“If a mild economic contraction plays out, then our analysis shows that gold should continue to deliver steady returns in the second half of the year as bond yields remain stable and the U.S. dollar weakens,” Juan Carlos Artigas, global head of research at the World Gold Council, told MarketWatch.
In this scenario, the council’s gold-valuation tool suggests that gold will “remain supported, with the average price in 2023 well above last year’s average,” he said.
“While significantly higher yields could bring challenges, we believe that gold’s much stronger positive reaction — if economic conditions deteriorate — can provide an effective hedging tool while still capturing some upside in the event of a soft landing,” Artigas said.
Still, a soft-landing scenario, in which a recession is avoided but monetary policy remains tight, may create “headwinds” for gold and result in “disinvestment,” as a soft landing would favor risk-on assets and a stronger U.S. dollar, the World Gold Council report said. Gold would also “face challenges” if central-bank monetary-policy tightening continues for longer than expected.
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