A 3% gain in December, owing to a weaker dollar, took the value of gold to $1 814/oz, resulting in a year-on-year gain of 0.4% – something the World Gold Council (WGC) says looked unlikely to many just two months ago.
The WGC says 2022 provided a “textbook” example of how diverse sources of demand and supply can counterbalance one another and provide gold with its uniquely stable portfolio-additive performance.
In addition, the WGC says gold’s resilience in 2022 was a result of its often ignored multifaceted sources of demand and supply.
Institutional investing demand, such as exchange-traded funds (ETF), over-the-counter (OTC) and futures, was weak but retail demand was strong and central bank net buying performed even better, the WGC reports.
As such, gold’s volatility remained close to its long-term average of 16%.
However, as a result of these factors, many questioned the WGC on why gold did not perform better than it did, taking into account multi-decade-high inflation.
The WGC responds that two factors played a major role, the first being long-term inflation expectations remaining well anchored in 2022. This, the WGC says, suggests that investors were confident that central banks could control inflation.
The second factor was that institutional and professional investors were likely more interested in how they are compensated for inflation, and hence taking more cues from monetary policy, as opposed to inflation developments.
Counteracting this institutional malaise, the WGC points out that retail investors were significant buyers of gold in 2022, with demand for the first nine months of the year having reached an eight-year high.
The WGC’s analysis suggests that retail investors, especially in emerging markets, which make up about 60% of the sector, are more wary of inflation, as well as the level of prices, taking into account low access to protection.
Particularly for non-US investors, gold proved a lucrative investment in 2022, gaining well in other local currencies.
In Europe and the US, retail investment stayed buoyant despite inflation and heightened geopolitical risk.
“Arguably the most surprising development in the gold market in 2022 was the level of demand from central banks,” the WGC says in a statement.
By the end of the third quarter of 2022, 673 t of gold had reportedly been added to reserves – a historical high – while in October and November, gold additions continued but at a slower pace.
However, a substantial proportion of additions remains unreported, making it difficult to determine the date of purchase, the WGC says.
Central banks also acquired 50 t of gold in November, up 47% month-on-month.
Going forward, the WGC forecasts a stable but positive outlook for gold prices, taking into account a mild global recession playing out. Other influential factors for gold this year include a weaker dollar, decreases in inflation, pressured equities and continued geopolitical risk.
Regionally, Chinese gold demand experienced a seasonal rebound in December, with the average daily trading volume being 38% higher month-on-month.
Indian retail demand remained muted during the seasonally quiet month of December, while higher gold prices remained a key headwind for gold demand during the month impacting both wedding and regular purchases.
In the US, two highly anticipated announcements in December appeared to send gold sentiment in opposite directions, the WGC says. The first was the release of the consumer price index – the data of which showed that headline inflation rose only 0.1% in November from October, bringing the year-on-year gain to 7.1% – the lowest since December 2021.
The council says many investors assumed that the good news on inflation would have a notable impact on the US Federal Reserve’s policy, but that the release of the December policy meeting statement – the second anticipated announcement – followed by US Federal Reserve chairperson Jay Powell’s press conference, sent gold lower.
ETFs
As for ETFs, the WGC reports that physically-backed gold ETFs experienced outflows of $3-billion in 2022 – equivalent to a decline in holdings of 110 t, reflecting an “interesting” year for gold ETFs. This is because gold demand surged during the first four months, as geopolitical risk took centre-stage, before steadily returning these gains as aggressive interest rate hikes dominated the narrative.
At the end of 2022, global gold ETF assets under management totalled 3 473 t, worth $203-billion.
As 2022 progressed, physically-backed gold ETFs registered declined for the eighth consecutive month in December, with global holdings declining by 4 t ($534-million), to 3 473 t ($203-billion).
Nonetheless, the WGC points out that the pace of gold ETF outflows continued to slow amid a 3% rise in the gold price during December.
Going forward, the WGC says gold ETF performance will likely continue to be driven by the interplay between inflation and central-bank intervention. “A mixture of headwinds and tailwinds implies gold’s performance in the next twelve months could be similar to that of 2022 – stable with a positive bias.
“But the outlook remains highly uncertain, leaving room for the possibility of more extreme outcomes,” says the WGC in a statement.