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Gold Market Commentary

Gold hit new highs in 2023

EM inflows mop up DM outflows 2023 review

Gold prices rose 15% in 2023 to reach US$2,078/oz, the highest annual close on
record 1. The closing price was also a daily record and was mirrored in all but one Emerging market (EM) demand for
gold provided not only a ballast to
currency (Table 1). Gold also ended the year as one of the best performing
lacklustre developed market (DM)
assets. According to (GRAM), the influential drivers of gold’s return in 2023 were
activity but also helped drive gold
central banks, geopolitics, interest rates and gold’s previous (lagged) monthly
prices to record highs.
return (Chart 1).

We estimate that central banks contributed between 10 and 15%. As not all Central bank demand, primarily
central bank buying is observable at a contemporaneous monthly frequency, we from EM institutions, was a
rely on two factors within our model to infer central bank impact: the constant significant contributor: we estimate
(economic expansion) and the portion that is unexplained. Prior to 2022, the this added up to 15% to gold’s
constant was c.4%; we believe central bank net buying has been a strong annual performance.
contender for driving that up to almost 8% since then. In addition, the
unexplained portion of returns totalled 12% in 2023. If we attribute the change Bond yields, despite hitting a 15-
in the constant and all of the residual to central banks we reach a figure of 17%. year high in October, were only a
A variation of GRAM in which Brent crude oil is replaced with the Geopolitical Risk small drag as they made a round
Index (GPR) gives us 13%, so we settle on a figure between 10 and 15%, partly as trip to end the year roughly where
we can’t rule out surprisingly resilient retail demand as an additional contributor. they started.

Chart 1: Central banks and geopolitics help drive gold to new high*

12
Looking forward
10
8
6 Geopolitical risks continue to
Return, %

4
2 bubble in the Middle East adding
0 to near-term inflationary risks.
-2
-4
-6
-8 January tends to exhibit seasonal
Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23
strength. The jury is out on
Economic Expansion Risk & Uncertainty Opportunity Cost (FX)
Opportunity Cost (Rates) Momentum Unexplained whether recent price records deter
Gold Return or encourage investment. So far so
*Data to 31 December 2023. Our Gold Return Attribution Model (GRAM) is a multiple regression model of good.
monthly gold price returns, which we group into four key thematic driver categories of gold’s performance:
economic expansion, risk & uncertainty, opportunity cost, and momentum. These themes capture motives
behind gold demand; most importantly, investment demand, which is considered the marginal driver of gold A recent speculative focal shift to
price returns in the short run. ‘Unexplained’ represents the percentage change in the gold price that is not
explained by factors already included. Results shown here are based on analysis covering an estimation period the 2-year Treasury yield suggests
from February 2007 to December 2023. Source: Bloomberg, World Gold Council that markets may have gotten
Source: Bloomberg, World Gold Council
ahead of themselves after the
December Fed meeting.
1
Using LBMA Gold Price PM

Gold Market Commentary | December 2023 01

Table 1: Record high set in all but one currency (CHF) in 2023
USD EUR JPY GBP CAD CHF INR RMB TRY AUD
(oz) (oz) (g) (oz) (oz) (oz) (10g) (g) (oz) (oz)
28 December 2023 price 2,078 1,877 9,437 1,632 2,747 1,748 55,578 475 61,211 3,036
December return 2.1% 0.4% -2.7% 1.2% -0.7% -1.9% 1.8% 1.8% 4.2% -1.5%
Y-t-d return 14.6% 10.8% 23.4% 8.7% 11.7% 4.2% 15.2% 18.1% 80.4% 14.0%
*Data to 31 December 2023. Based on the LBMA Gold Price PM in USD, expressed in local currencies.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Elevated geopolitical risk was a key driver in 2023 and is Price sensitivity would explain the negative coefficient for
captured by including GPR in our model. This contributed an lagged returns. And it is a factor that likely reduces gold’s
estimated 5% to returns and mitigated a drag from falling volatility. When we compare gold to other commodities there
inflation and other risks (-3% contribution). appears to be a link between the lagged coefficient of the
dependent variable and annualised volatility (Chart 2). We
Interest rates appeared to have had a lower drag on prices
have added bitcoin to the analysis to highlight that such a
than might have been assumed at the start of the year. A
highly speculative asset is likely to have a higher volatility,
round-trip in the 10-year yield (both nominal and real)
part of which is driven by increased speculative momentum.
coupled with central bank buying and generally elevated
uncertainty helped gold prices remain somewhat unscathed
by volatile opportunity costs. Nominal yields contributed c. - Looking forward
2% to gold’s performance, and if net out the impact of
Our Gold Outlook 2024 analysed three economic scenarios
breakeven inflation it suggests the impact of real rates was
c.-3%. and their likely effect on gold in 2024. One of these scenarios
focused on the consensus view that a soft landing would be
When the monthly impacts are added together, gold’s prior engineered in the US and Europe; China’s growth would be
monthly return created a significant cumulative drag in 2023 soft; inflation risks would abate but longer maturity interest
(-4%). But this could be viewed as a positive volatility– rates would remain stubbornly elevated, and high prices
dampening feature of the gold market. It works in reverse would restrain consumer demand. In this context, gold
too, as we saw between 2013 and 2015. performance could be lacklustre and any upside may
depend on continued central bank demand.
Chart 2: Self-correcting gold prices contribute to
lower relative volatility* However, the dramatic move in interest rates and policy
120% expectations following a ‘volte face’ by the Fed in December
Bitcoin may have increased the inflation resurgence risk. Financial
100%
conditions have eased markedly on the back of the bond
80%
market rally but market expectations of policy rate cuts seem
Annualised volatility

excessive (Chart 3) –a concern some Fed officials have voiced

60% since the December meeting 2 – and the tensions around the
Natural gas
Suez Canal have highlighted how continuing geopolitical
40% Lean hogs
factors can have swift inflationary (cost-push) implications.
Silver Nickel Brent crude
Wheat Cotton
Sugar
Zinc
20%
Chart 3: Markets may have gotten ahead of
Copper
Gold
Aluminium

0% themselves*
-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3
Coefficient of lagged Y 1

0.5
*Monthly data from December 2010 to December 2023. X-axis shows the coefficient
for the lagged return of respective asset from a regression of the return of each
0
asset on the its lagged return and the current and lagged return of the US dollar
Cuts / Hikes

index (DXY). The y-axis shows the annualised volatility over the whole window.
-0.5
Source: Bloomberg, World Gold Council

-1
The drag from lagged returns supports the notion that the
gold market is populated by price sensitive buyers alongside -1.5

investors that buy into stronger prices – a feature of gold’s

-2
dual nature. We have found this to be the case in both 2016 2017 2018 2019 2020 2021 2022 2023 2024
jewellery and bar and coin segments at annual and quarterly Fed Dot Plot Market (OIS) Difference
frequencies. Central banks may also exhibit price sensitivity, *The Fed dot plot (Summary of Economic Projections) vs. market (OIS) expected
particularly if they are purchasing at regular intervals over a policy rate one year ahead as of December of the prior year. Data from December
longer period of time-something we’ve witnessed over the 2016 to December 2023.
Source: Bloomberg, World Gold Council
last two years.

2
Top Federal Reserve officials try to damp expectations of imminent interest rate cuts (ft.com)

Gold Market Commentary | December 2023 02

Although we still view a material resurgence of inflation as a
remote possibility, this scenario would likely be longer-term Moderate start to 2024
positive for gold, as it undermines monetary policy and risks Gold was a surprising star in 2023, surging against the odds
an even harder landing further down the road. of rapidly rising interest rates and resilient economies.
Central banks are largely to thank for the outperformance,
Chart 4: Gold dances to the 2-year tune when
but elevated geopolitical risks likely created investor
policy uncertainty is high*
reticence to give up gold as well as being a key driver of
0.4 6 central bank demand. Meanwhile, the rates-driven weakness
0.3 Gold correlates more
5 seen in developed markets, led by European ETF flows, was
to 2y than 10y
insufficient to dent gold’s performance.
0.2
0.1 4
Correlation

In the near term, a tug-of-war between historically positive

Yield, %
0.0
3
-0.1
-0.2 2 January seasonality and some pushback against the dovish
-0.3
1
sentiment that drove prices to all-time-highs in December is
likely. Equally, there may well be a battle between
-0.4
-0.5 0
2017 2018 2019 2020 2021 2022 2023 intermittent inflationary scares (shipping costs) and
Gold vs 2y TIP yield Gold vs 10y TIP yield Fed Funds rate (rhs)
recessionary impulses (JOLTS hiring), highlighting how
*Daily data from March 2016 to December 2023. Correlation calculated on a 200- perilously narrow the path to an economic soft landing is.
day rolling window between log return on gold price (US$/oz) and change in bond
yield.
Source: Bloomberg, World Gold Council

In 2023, gold played more to the tune of the 2-year Treasury

yield (real and nominal), than the historically more important
10-year yield, something that tends to occur during
heightened policy uncertainty (Chart 4). This anomaly
diminished during the summer, as peak rates appeared
more certain and supply issues focused attention on the
back-end of the yield curve. Over the last few weeks,
however, it appears we‘ve seen a shift back to monetary
policy, perhaps highlighting the perilously narrow path to an
economic soft landing.

Gold Market Commentary | December 2023 03

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World Gold Council Research

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Gold Market Commentary | December 2023 04

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