World Gold Council: Here’s how gold could fare on a soft or hard economic landing

• Gold with strong performance in the first half of the year
• World Gold Council examines gold price developments in various scenarios
• Precious metal as a profiteer

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The price of gold was surprisingly volatile in the first half of 2023. The US banking crisis, triggered by financial turmoil at the US financial houses Silicon Valley Bank, Signature Bank and First Republic, has driven many investors into the commodity, which has proven itself as a crisis currency. The mammoth takeover of Credit Suisse by the domestic competitor UBS also provided a boost for gold, while the interest rate policy of the central banks and in particular the maintenance of hawkish rhetoric had a negative impact on sentiment on the gold market. Nevertheless, the bottom line for the first six months is a plus: the price of gold rose by more than five percent from January to the end of June.

This means that the precious metal has not recommended itself as an alternative to the stock market – after all, the S&P 500 and DAX have increased by around 16 and 15 percent respectively, and the NASDAQ 100 tech index has even gained around 39 percent. From an investor’s perspective, however, gold has once again proven itself as a safe haven in economically uncertain times and especially as an addition to portfolios.

Further gold price development dependent on economic development

What happens next for the gold price in the second half of the year is likely to depend in particular on the development of the global economy, specifically on whether the tightening cycle by the central banks will result in a soft or hard landing. The World Gold Council has examined both scenarios and their possible effect on gold price developments.

In principle, the global lobby organization assumes that there is considerable upside potential for the precious metal over the course of the year. At the same time, however, the experts also pointed out possible downside risks – especially against the background of economic uncertainties.

Gold prices on a hard landing in the economy

The precious metal should benefit if there is a rapid downturn in the economy and a so-called “hard landing”. Gold is likely to see “stronger investment demand as economic conditions deteriorate,” according to the World Gold Council in its recently released semi-annual Gold Outlook report. In this context, the experts stressed that an economic deterioration could be caused by a significant increase in defaults due to tighter credit conditions or other “unintended consequences” of the high-yield environment. So if the central bankers stick to their policy of tightening interest rates or if they have already raised the key interest rates too much too quickly, the global economy is threatened with a recession that will only be mild at best.

This scenario is positive for gold price investors, because gold has always been seen as a beneficiary in economically uncertain times. Market participants are then likely to withdraw more and more money from shares and other investments. High-yield risky investments in particular could then be reallocated in favor of a less profitable but more stable gold price investment.

The World Gold Council also confirms this in its half-year outlook, taking the historical development in particular as a benchmark. Historically, periods of economic deterioration have led to “higher volatility, significant falls in stock markets and general demand for high-quality, liquid assets such as gold,” the experts write.

Gold prices on a soft landing of the economy

However, the market consensus currently expects a slight economic downturn in the USA and slower growth in the developed markets by the end of 2023.

In particular, speculation about the end of the rate hike cycle and the hope that the monetary policy “likely to move from tightening to holding pattern”. In that case, according to the World Gold Council, gold prices should see further support but “may not break out significantly from the ranges we’ve seen so far this year.” According to the experts, support comes from fluctuating bond yields and a weaker dollar – especially against the background of the robust gold performance in the first half of the year.

While slow economic growth in the west may weigh on consumer spending, the Indian economy is expected to hold up better and China to respond to any potential stimulus later in the year and provide some support to local demand, according to the World Gold Council. “In addition, the combination of stock market volatility and ‘event risk’ (e.g. a geopolitical crisis or a financial crisis) should mean that hedging strategies, including gold, remain in place, despite signs of a slowdown in inflation.”

Gold still on the rise – but at different speeds

In summary, the World Gold Council is not assuming that the price of gold will see a more significant slump in the second half of the year. In the worst case for the precious metal, namely when the expected slight economic downturn occurs in the USA, a “more neutral second half of the year” can be expected. In this scenario, too, gold is supported by a weaker US dollar and stable bond yields. In addition, the experts point to history as a source of information: in the past, monetary policy halt cycles would have led to an above-average return on gold.

Meanwhile, increasing volatility and risk aversion would be the consequences of a pronounced economic downturn – here the environment for gold should develop significantly positively.

Nevertheless, the experts also point to risks that would arise in particular if the tightening of monetary policy lasted longer than expected. According to the semi-annual report, this would “pose challenges for gold”. In addition, a soft landing could lead to risky assets being favored and the US dollar gaining strength, “which would likely lead to divestment of gold.”

Editorial office finanzen.net

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