The World Gold Council (WGC) has released new data indicating a continuation of gold acquisitions by central banks worldwide, with Turkey being the notable exception due to its extensive sell-off. The data shows that in May, eight central banks increased their gold reserves with a net purchase of 50 tons. However, Turkey's decision to sell another 63 tons of gold in May led to a net decrease of 27 tons in the global gold holdings of central banks.
Since March, Turkey has sold nearly 160 tons of gold. The WGC believes that this sell-off is a response to local market dynamics and is unlikely to reflect a long-term strategic shift in the Turkish central bank's stance on gold.
In June, global gold ETFs experienced an outflow of 56 tons of gold, valued at $3.7 billion. The first half of the year saw an outflow of 50 tons or $2.7 billion, predominantly from Europe and North America, where the outflow reached 53 tons or $3.5 billion in June alone.
The WGC's mid-year outlook report for 2023, published last Thursday, suggests that developed market central banks are nearing the end of their tightening cycles. The consensus in the market is that the U.S. economy will experience a mild contraction by the end of this year, and developed markets will continue to grow slowly. However, given that the impact of monetary policy on the economy often lags, investors are concerned that a hard landing may still be on the horizon.
Taking into consideration these circumstances, as well as the positive returns on gold in the first half of the year, the WGC anticipates that gold will continue to benefit from the fluctuating range of bond yields and a weak dollar. Should the U.S. economy mildly contract, gold, which performed strongly in the first half of the year, may assume a more neutral position in the second half. If economic conditions worsen, the demand for gold as an investment will be more robust. A soft landing of the economy or prolonged monetary tightening beyond expectations could favor risk assets and a stronger dollar, potentially causing investors to reduce their gold investments.
On the upside risk for gold prices, the WGC report mentions that if recession risks increase, gold investment may see larger gains. Tighter credit conditions or any unforeseen consequences arising from a high-interest-rate environment could lead to a significant increase in defaults, possibly exacerbating the economic downturn. Historically, gold has performed well during economic recessions when market volatility is high, stock markets experience substantial pullbacks, and investors generally demand high-quality liquid assets like gold.
On the other hand, a soft landing-avoiding economic recession while still maintaining monetary tightening-could pose upward resistance for gold, leading to reduced investment. This situation was evident with the substantial outflow of funds from gold ETFs in June and the overall decline in gold holdings since the start of the year.
However, the WGC report notes that given gold's positive performance in the first half of the year, a significant sell-off by investors would be needed to bring this year's average gold price below last year's average level of $1,800 per ounce.
The report also mentions that when assessing the impact of restrictive monetary policy and the likelihood of an economic recession, investors often adopt defensive strategies in their asset allocation. A common strategy is to shift some stock exposure towards defensive sectors to limit losses during significant stock market downturns.
Gold can play a significant role in enhancing investors' defensive strategies. WGC research has found that over the past 25 years, strategies that incorporated gold have yielded higher returns while reducing volatility and drawdowns.
Considering the inherent uncertainty in predicting the global macroeconomic landscape, the WGC believes that gold, with its prior positive asymmetric performance, can be a vital component in investors' portfolio management tools.
The WGC mentioned that gold not only offers positive returns for investors but also helps to mitigate volatility, especially during times of regional banking crises, as experienced in March this year. This is underpinned by the relative stability of the dollar and interest rates, hedging against event risks, and the ongoing demand for gold by global central banks.
Juan Carlos Artigas, Director of Global Research at the WGC, pointed out that if a mild economic contraction occurs, the WGC anticipates that gold will continue to deliver steady returns in the second half of this year as bond yields remain stable and the dollar weakens. In this scenario, the price of gold will continue to be supported, and this year's average price will be higher than last year's average level.
