Bucking the Fed's Rate Hikes, Gold Demand Remains Healthy Entering 2023

• Gold demand remains strong, with record central bank buying in 2022 and continued retail demand in key markets like the US.
• Rising interest rates have been a headwind for gold this year, but we may be nearing the end of the rate hike cycle.
• Recession risks could drive more demand for gold as a safe haven asset if economic conditions deteriorate.
• The US dollar strength heading into the 2024 election could impact gold, depending on if geopolitical tensions continue rising.
• China and India are important sources of retail gold demand to watch in the months ahead as key factors like holiday demand play out.

Gold Still Glitters for Investors Despite Headwinds in 2022

Gold has endured its share of headwinds in 2023, but demand remains robust in many key segments and the metal continues to prove its value as a safe haven asset in times of economic uncertainty. However, there is good cause for ongoing optimism about gold amidst the volatile backdrop of rising rates and recession fears.

While investment demand slowed this year in the face of repeated rate hikes by the Federal Reserve, gold buying by central banks reached record levels in 2022. That suggests official institutions still see major value in holding gold reserves to diversify risks. Just in the first half of 2022, there was strong purchasing from central banks in China, Singapore, Poland and elsewhere.

2023 is unlikely to hit the record demand levels of 2022, but Central Bank buying should remain robust. This comes even as some banks like Turkey became net sellers of gold to provide liquidity during financial stresses. Central banks can add gold to their portfolio and Reserve portfolio and, of course, make use of it during the course of times of need. Beyond central banks, retail demand for bars and jewelry is still going strong in many areas like the United States. While futures and ETF flows grab headlines, physical gold buying by everyday investors is less visible but still accounts for a sizable share of the global market.

In fact, the US ranks as the third largest source of physical gold demand in the world behind China and India. 2022 saw inflows of 34 tons of gold into the US market in the second quarter alone. Year-to-date declines in American ETF volumes, while real, need to be seen in the wider context of broad-based retail demand. Actually, most investors have actually either held their investment in gold or actually paired it back somewhat. We've seen somewhere around just a 4% decline in ETF volume.

When systemic shocks hit as with the brief US banking crisis earlier in 2022, retail investors reliably pile into gold as a haven. So the backdrop remains constructive.

Headwinds from the Fed Reserve

Of course, the 800-pound gorilla remains the Federal Reserve's rate hike campaign aimed at taming high inflation. After taking rates to 4%, the Fed is signalling that more increases are likely into 2023 along with higher rates for longer. This has been probably the most significant headwind against the performance for gold for the year and it's actually been something that we've known and expected.

But with the Fed potentially approaching the end of this rate hike cycle, investor attention will gradually return to gold. Once rates level off, allocations to gold could pick up in anticipation of future easing down the road. We would expect this from gold in this type of environment. We need to see a period of time where rates get held firm and aren't getting continual increases.

Increased recession fears could also bolster gold, which tends to gain as investors get defensive.

A recessionary environment is an environment that's going to be a strong environment for gold. If the environment is a strengthening dollar environment, it might impede the investment for gold in the US market, but it also might lead to continual support from the Central Banking Community overseas as they look to make sure that they allocate away from, not only risk environments that might be weak for the dollar, or strengthening for the dollar, but also diversifying away from the dollar.

Beyond the Fed and the US economy, there are other potential headwinds from geopolitical tensions. If sanctions expand significantly to restrict gold trading, it could hamper demand in places like China and India. For now though, those risks appear contained.

Key Overseas Markets

Beyond the United States, China and India will remain linchpins for global gold demand. Together they account for a majority of annual consumer purchases. In China, investors will be monitoring how economic stresses filter into the gold market. There are established channels for mainland Chinese to buy gold as an investment, either through futures, accumulation plans or ETFs. So demand could rise if consumers seek to protect their wealth. In India, the focus will be on how the end of the annual Monsoon season affects gold purchases headed into the holiday period. We're heading out of that season, it's been a mixed environment in terms of where you are in the country. Keep an eye on those two markets for demand, because that's retail demand that's a significant number

Gold has room to surprise US investors who may be overly focused on rate hikes and dollar strength. Holiday-driven demand in China and India could provide fundamental support.

With many actions left to play out in the global economy, the gold story still has room for twists and turns. But the long-run supply and demand picture that drives gold prices remains favorable, underpinned by deeply rooted cultural attraction across continents. Gold has endured for centuries as a store of value and that durable appeal is unlikely to tarnish anytime soon.

Why gold remains a good investment

• Gold provides diversification away from volatile paper assets like stocks and bonds
• It is a hedge against inflation, protecting purchasing power over time
• Gold has a negative correlation to the US dollar, appreciating when the dollar weakens
• As a physical asset with intrinsic value, gold offers stability amid economic and geopolitical crises
• Demand for gold jewelry and investment remains high in major markets like China and India
• Central banks continue accumulating gold, signaling it maintains an important role in reserves
• Limited new supply growth constrains production, supporting long-term price appreciation