Gold returns subside in 2022 in dollar terms

Prathamesh Mallya

By Mr. Prathamesh Mallya, AVP- Research, Non-Agri Commodities, and Currencies, Angel One Ltd

In 2022, the yellow metal has not favoured the investor’s portfolio despite a range of uncertain events across global markets. The Russia-Ukraine war, rising interest rates by global central banks, higher inflation has been at the helm of affairs for the tepid gold prices in 2022.

Gold prices have declined by around 2 percent in the YTD as on 22nd December 2022 while MCX gold prices have gained by around 13 percent on account of rupee depreciation of around 11.5 percent.The volatility in the gold prices tell us a clear story that there were too many factors at play and the role of gold as an asset class and an inherent portfolio diversifier were at risk. Let us assess what led to this volatility, the diverse factors impacting the yellow metal in the year gone by and what the year 2023 has in store for gold investors.

Tightening Monetary policy of Central Banks – Hindrance for gold price rally

In the decade to 2021, the inflation in the US was mostly below its central banks target of 2%, while India often experienced spikes beyond its target of 4-6% range. As a result the inflation in India was higher by an average of 4%. This relationship flipped in 2022, as prices rose much more steeply in the US, with rising inflation volatility making it even more critical for the US Federal Reserve to continue tightening the monetary policy in 2022. The underlying reason for golds underperformance in dollar terms was on account of global monetary tightening by central banks, as inflation was a major cause of concern across global markets. The index below gives a birds eye view of how the inflation trajectory has been for major economies.

Outlfows in ETF’s and Central Banks accumulate gold reserves

The component of gold demand consists of jewelry demand, Central Banks demand, ETF’s, Bar and Coins, Technology demand. Let us see how each of this demand component has fared in the past year.

Central Banks augmented their gold reserves in 2022

Central Banks have been augmenting their gold reserves every year and 2022 was no different. Latest data from the World Gold Council states that Global central bank purchases leapt to almost 400t in Q3 2022 (+115% q-o-q). This is the largest single quarter of demand from this sector since 2000 and almost double the previous record of 241t in Q3 2018. It also marks the eighth consecutive quarter of net purchases and lifts the y-t-d total as of 1st November 2022 to 673t, higher than any other full year total since 1967.

As far as the ETF arena goes, global gold ETFs registered their seventh consecutive month of net outflows in November 2022. On a y-t-d basis as on November 2022, global gold ETFs have now seen 83t (US$2.4bn) of net outflows, predominately from North American- and Asian-listed funds.

Bar and Coins and Jewelry Demand in 2022

The pent up demand due to the pandemic has resulted in to steady and increased buying of jewellery and Bar and Coin in the first three quarters of 2022 as can be seen in the data sets above when compared to the same period in 2021.

Moreover, increasing central bank buying (as discussed in the report before) and steady growth in jewellery demand over the first three quarters of 2022, partly offset the decline in ETF demand.

All in all, the demand side of the story did not bode well for gold prices and failed investors expectation on the returns front, taking in to consideration the uncertainty across the globe.

Speculative positions – fund managers dump gold in 2022

The CFTC positions in the first half of the year indicated that global fund managers have been accumulating gold for most of the year. However, in the second half, when the central bank started raising interest rates, the yellow metal started to lose its momentum and so the hedge funds started dumping their positions in gold. As can be seen in the chart alongside, the net longs in gold at the stort of the year stood at around 1,00,000 net longs while hedge funds become net sellers of gold after June 2022 and the current net longs as on 13th December 2022 stood at 56,554 contracts.

Gold prices to move higher in 2023

The events that happened in 2022 like higher interest rates, higher inflation, continuing Russia-Ukraine war, stronger dollar continue its path in 2023 also. Globally inflation, is still a headache for central banks and the path of interest rate normalisation and winding up of QE will be an hindrance for gold prices in 2023.

Global output has contracted due to downturns in Russia and China as well as virtually stagnant output in the US. Rapidly deteriorating growth prospects throughout Europe have ignited a debate about the possibility ofa a global recession during 2022 and 2023.

Moreover, the World Bank has slashed its growth forecast for China to 2.7% in 2022 from 4.4% estimated in June 2022 and to 4.3% in 2023 from 8.1% projected earlier in June 2022. With the world’s second biggest economy in such a slump, the global economy is expected to slump steeply amid a mix of adversities ranging from high inflation and lingering covid snarls to the effects of the Ukraine war.

The dollar has been at the helm for the major rise and fall of commodities historically. Dollar strength and commodities inverse co-relation and vice-a-versa has been the norm for past so many decades.

However, after strengthening for nearly two years straight, the US dollar index (DXY) has recently seen a steep drop, despite continued widening of – both actual and expected – rate differentials. In 2023, if dollar continues to slide, we will see the inverse co-relation of weaker dollar and rising commodities a common phenomenon and gold and silver will be the largest beneficiary of this co-relation.

Overall, the year 2022 has been a roller coaster ride as none of us could have predicted what was coming. However, in 2023, 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 recessions. Hence, we expect gold to perform in 2023 with double-digit returns.

We expect gold prices to move higher towards Rs.58000 in 2023, while $2100/ounce mark in the international markets looks very much likely in 2023. The accumulation zones for gold can be in the range of Rs,48000-50000/10 gms for those who want a value buying in gold. Our advise to investors is to accumulate gold on every dips as a game of strategy rather than making an impulsive buying on account of price rise.

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