Days ago, the World Gold Council released their latest Gold Market Commentary. Here, we distill their analysis to a few important takeaways that can help investors understand what has happened with gold and where it might be headed.
Wham, Bam, Thank You GRAM
The World Gold Council’s Gold Return Attribution Model (GRAM) is a function used to quantify how the various drivers of gold’s performance contribute to monthly price changes. The model also assesses how the influence of these drivers change over time. GRAM was helpful in understanding the cause of gold’s 3% gain in December of 2022 which helped the metal end the year on a positive – albeit slightly – gain. The data within GRAM suggests that this positive return was largely due to a weaker US dollar.
Retail and Central Bank Demand Lifted Gold
Strong demand for gold from both retail and central banks was enough to offset weak demand seen among institutional investors. As the World Gold Council explains, “an unrivaled surge in real yields (coupled with a strong US dollar) failed to drag gold down in 2022.” This outcome is an example of why diverse sources of demand are critical to the long-term performance of gold especially in years that threaten to bring price per ounce down.
Gold Continues to Offer Low Correlation and Low Volatility
Gold’s correlation to a traditional 60/40 portfolio – while higher than average – was still low at 20. This is an important benefit of gold for most retail investors seeking to bring stability to a portfolio that continues to face the uncertainty of a looming recession and interest rate increases. Additional data showed that gold’s volatility was in line with its long-term average while the 60/40 portfolio experienced one of its most volatile years since 1972.
Gold Buyers Likely Want Protection From Inflation
Analysts at the World Gold Council concluded that the increasing gold purchases seen among retail investors was likely due to concerns about inflation. This was especially true within Emerging Markets according to their research. This segment of the market, which represents 60% of all retail investors, has fewer ways to counter rising inflation. Central bank purchases added to this purchasing activity as 673t was added to reserves by the end of Q3 which is a historic high.
2023 Could Bring a Mild Recession
The World Gold Council sees a “stable but positive outlook for gold prices.” Additionally, their analysis forecasts a weaker US dollar, pressure on equity prices, slightly higher bond yields, and continued geopolitical risk stemming from the uncertainty surrounding the war in Ukraine. Finally, the World Gold Council noted a seasonal rebound in gold demand in China at the end of 2022. Much of this buying was due to consumer activity being driven by the Chinese New Year. While this seasonal surge was low in comparison to historical figures, analysts at the World Gold Council expect it to improve as China continues to find its way out of their zero COVID policy.
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