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Central Bank Attitude to Inflation Key for Gold in 2023

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BBS Team

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Central Bank

2023 is set to be a crucial year for gold prices, as the World Gold Council’s new report points to central banks responding to falling yet high inflation rates as the key factor. In this light, gold is likely to emerge as a hedge against economic strife, restoring its traditional status as a safe haven asset. As investors and central banks begin to place increased emphasis on long-term investment strategies, and with liquidity concerns at the forefront of the global economy shoring up demand for gold, it is clear that the precious metal may be posed for an upturn next year.

Central Bank Attitude to Inflation Key for Gold in 2023

The World Gold Council mentioned on Thursday that the big influencer of gold prices this year was predominantly driven by the climbing inflation rates and more aggressive interest rate changes from the central banks. As a result, the “interplay” between these two crucial factors is expected to be a major factor in determining the price movement of gold in 2023. The WGC said that the economic consensus is that in the coming year, weaker global economic growth is likely with the possibility of small localized recessions.

“Consensus forecasts now expect global GDP to rise by just 2.1% next year. Excluding the global financial crisis and Covid-19, this would mark the slowest pace of global growth in four decades and meet the IMF’s previous definition of a global recession,” the WGC said.

This, on top of elevated inflation levels, is likely to provide a mixed outlook for gold–with both head and tailwinds present.

With tailwinds both short-term and long-term in the works for gold, there appears to be no obstacle on the horizon that can stop it from reaching higher prices. Historically, mild recessions have been beneficial for gold as investors tend to move their assets to safer havens. Additionally, a tapering of interest rates could weaken the dollar and thus drive up demand for gold too. On top of this, geopolitical risings and China’s re-opening its markets may spur further physical demand for gold both in the domestic and international market. Therefore, one can expect brighter days ahead for those investing in precious metals.

That said, pressure on all commodities from a slowing economy is likely to weigh on gold in the first half of next year, the WGC said. Likewise, if central banks tighten monetary policy more than expected, gold is likely to face further headwinds.

“A lot has been written about the traditional 60-40 portfolio having a tough time this year, but those investors who have had gold in their portfolios have fared better,” said Juan Carlos Artigas, global head of research at the WGC, in a call. “Those investors have seen better returns, less volatility and fewer losses and gold can play an integral complementary role in different scenarios.”

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