Gold’s performance throughout 2022 could be summarized simply as “surprising.” For some investors, gold was surprising as it did not live up to performance expectations despite several supportive catalysts for the price, including: rising equity market volatility as indices broadly entered a bear market; the Russian invasion of Ukraine raising the specter of long-lasting geopolitical turmoil in Europe; and multi-decade-high inflation weighing on the global growth outlook.
Conversely, other investors found gold surprising in its endurance to portfolios and how well gold held up in the face of the Federal Reserve (Fed) aggressively increasing interest rates, rising real yields, the US dollar hitting a 20-year high,1 and sporadic lockdowns in China impacting gold demand.
In our view, the truth is somewhere in the middle since, on a relative basis, gold did quite well throughout 2022 (see Figure 1). Gold outperformed global stocks and bonds, and provided portfolio diversification while also testing its all-time-high price in US dollars after reaching US$2070/oz in early March.2
Figure 1: Gold’s Relative Outperformance May Shine Throughout 2023 With Overhang of Global Uncertainty
These conflicting perspectives may persist into 2023. The biggest headwind that still remains is the path of Fed rate tightening, particularly in the first half of 2023. Stronger tailwinds may emerge in the latter half of 2023 as gold aims to resume its long-term upward trend. Overall, the outlook for gold next year may be buoyed by:
The Fed’s hawkish turn to combat rising price inflation in 2022 came at an unprecedentedly aggressive pace. The Fed increased its policy benchmark by 375 basis points (bps) over the course of six months,3 applying four consecutive 75bps hikes and bringing its policy rate to the highest level since 2008.4 These actions were felt across capital markets, with broad-based equity indices falling by double digits. Additionally, the US 10-Year Treasury yield more than doubled to 3.61% in 2022.5 Meanwhile, US real yields rose over 230bps from -1.10% at the start of year to +1.24% as of November 30, 2022.6
The Fed may have broadly achieved its target goal of “squashing” inflation, given the decline in market expectations for US inflation and correction in financial assets. As a result, it seems more likely that the Fed may slow its pace or pause its hiking cycle in the first half of 2023. The gold price declined in response to these shifting interest rate levels, while also closely tracking the decline in inflation expectations (see Figure 2). Despite this, gold held up better than historical averages would suggest, particularly given the sharp rise in real yields. This likely was due to rising investment demand from persistent global inflation, financial market volatility, and geopolitical turmoil, but also growing concerns that the continued aggressive interest rate path could spark risks to the broader financial system and potentially push the US, and in turn the global economy, into a recession.
With the likelihood of a US recession growing, gold may benefit from investors trying to pivot towards counter-cyclical and defensive portfolio positioning. Gold’s behavior during previous recessionary periods in the US is clearly in favor of the yellow metal. Gold’s performance during other cyclical phases shows that on average, gold also fares well outside of recessions. Gauging leading economic indicators7 shows that gold has typically done well in three of the four phases of a full economic cycle (see Figure 3). On an average monthly basis, gold has done best during periods of recession and slowdown, during which it has outperformed US equities, US Treasurys, commodities and the US dollar. Even during periods of US economic recovery, gold has shown positive returns while keeping pace with other defensive portfolio assets such as Treasurys and the US dollar.
Another result of the jump in US nominal and real interest rates was a surge in the US dollar relative to other currencies. The emergence of a US dollar bull market in 2022 was certainly unexpected, and growing demand for the greenback pushed its spot index to the highest level since 2002 (see Figure 4).
Given the historical negative correlation between gold and the US dollar, gold came under pressure in the strong dollar environment that emerged this year. But expectations for a monetary policy pivot or pause in 2023, along with mean reversion in other global economies, may put pressure on the US dollar. This may lead to renewed interest in gold among US investors seeking to hedge against a more temperate US dollar environment.
Non-US gold investors saw a stark contrast in gold price performance (see Figure 5). Gold in Japanese yen, British pound, and euro terms carried positive returns in 2022 for local currency investors. Additionally, gold in emerging market currencies, such as the Chinese yuan and Indian rupee, saw significant outperformance versus the US dollar price of gold.
This dynamic of currency depreciation globally, whether it be deliberate (a result of a strong US dollar as well as rising wage and commodity prices) or accidental (through fiscal policy missteps such as in the United Kingdom in 2022), highlights the store-of-value aspect gold offers investors. This partly explains why, despite rising US rates and a strong US dollar, global investment demand for gold rose: to protect against depreciating currencies and loss of spending power due to inflationary pressures. Gold also benefited from serving as a potential hedge against rising volatility of global stocks and bonds, in particularly emerging markets, which have been significantly impacted by the rising US dollar and interest rates.
Looking ahead, a correction in the US dollar from its current lofty level may portend renewed interest in gold among US investors — alongside a global investor base that has been very happy with gold’s performance recently. The end result may be a more evenly balanced investment demand for gold globally.
Global demand for gold in 2022 was strong among key sectors including investments, jewelry, and central banks (see Figure 6). In fact, looking at average quarterly demand for the past five years, the pandemic had a material impact on gold demand, with a quarterly average of 913 metric tons in 2020 compared to the 2018-2019 quarterly average of approximately 1,102 metric tons.8 Since the drop in 2020, however, the average quarterly demand from 2021-2022 was 1058 metric tons — returning closer to its’ pre-pandemic pace and in line with longer-term trend levels.9 This is a healthy sign that the fundamental drivers for gold are on strong footing heading into 2023.
Headwinds like ongoing targeted COVID lockdowns in China may impact demand in that region, but strong investment demand in Europe and global central bank buying in 2022 are key trends that may persist into next year. Central bank net buying in particular was a source of significant demand, with an estimated quarterly record of 400 tons of gold added to central bank holdings in Q3. This brought the year-to-date 2022 central bank gold demand on par with record levels for full-year demand in 2018 and 2019.
Figure 6: Global Gold Demand Continues to Grow From Pandemic Low in 2020
Investment activity in response to the current monetary policy and macroeconomic environment may continue to drive the gold price into early 2023, but there are encouraging signs that global gold investment demand remains robust with potential further growth in this sector.
Global investment demand for gold saw a bifurcation in 2022 between retail bar and coin demand and gold ETF demand. While global gold ETF demand has experienced volatility (year-to-date demand is 6.7 metric tons as of Q310), retail bar and coin investment demand has seen steady growth (see Figure 7). In Q3 2022, bar and coin demand hit its highest quarterly level since Q1 2021 — led by Turkey, China, and India — and on a year-to-date basis, Europe accounts for the largest bar and coin demand. Growth among bar and coin gold demand globally highlights a persistent, sticky demand for gold investment. Overall, this is a positive sign that gold investment may see further support, particularly in an uncertain macroeconomic landscape in 2023.
Focusing only on gold’s -3.3% year-to-date return11 overlooks the benefit gold brought to diversified portfolios. 2022 saw an equity bear market, the Russian invasion of Ukraine, multi-decade-high inflation, and a breakdown of the traditional negative correlation between stocks and bonds. Taking these factors into account, gold weathered this market environment quite well. In fact, a global 60/40 stock/bond portfolio with a prorated 10% allocation to gold outperformed a portfolio without gold by 1.96% year to date (see Figure 8).
During the first half of 2022, when the S&P 500® Index experienced a 20% drop, a portfolio with gold outperformed by nearly 200bps. In the second half of the year, despite an equity market rally, gold served as a key portfolio diversifier, nearly matching performance of a portfolio without gold. Ultimately, 2022 was a case study on the benefits gold may bring to portfolios due to its distinct risk management capabilities.
The 2022 theme of uncertainty driving volatility will likely remain a top investment consideration in 2023. Potential market risks in 2023 include but are not limited to:
Gold may serve as a viable tool for investor risk mitigation against the potential for ongoing volatility. Historically, gold has outperformed stocks, bonds, the US dollar, and oil during periods of heightened volatility. This has been the case based on average monthly returns for not just implied equity market volatility, but also interest rate and currency volatility (see Figure 9). As uncertainty persists, investors may continue to turn to gold as part of a diversified portfolio risk mitigation strategy.
Considering these themes, three scenarios for gold’s outlook next year emerge — with a slight upward skew reflecting the potential for upside surprises for gold. This creates a barbell of outcomes with equal weighting for bear and bull cases, and an overall higher probability of a base case scenario outcome.
Figure 10: Gold May See Headwinds in 1H 2023 Followed by Strength in 2H 2023
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1 On September 27, 2022 the Bloomberg Dollar Spot Index reached 114.11, the highest level since May 6, 2002. Bloomberg Finance, L.P., State Street Global Advisors. Data as of November 30, 2022.
2 Gold spot price reached all time US dollar high price of US$2075/oz on August 7, 2020. Bloomberg Finance L.P., State Street Global Advisors. Data as of November 30, 2022.
3 Bloomberg Finance, L.P., State Street Global Advisors. Data as of November 30, 2022.
4 Bloomberg Finance, L.P., State Street Global Advisors. Data as of November 30, 2022.
5 Bloomberg Finance, L.P., State Street Global Advisors. Data as of November 30, 2022.
6 US real yields represented by the US 10-Year TIPS Implied Yield Index. Bloomberg Finance, L.P., State Street Global Advisors. Data as of November 30, 2022.
7 As measured by Conference Board LEI Index. Four phases of business cycle (recession, recovery, expansion, slowdown) were measured based on the direction and magnitude of changes of the Conference Board Leading Economic Indicator (LEI) Index. Recession: LEI Index declines to a trough at an accelerating pace; Recovery: LEI Index rebounds from a trough but below long-term trends; Expansion: LEI Index YoY changes are positive and above long-term trends; Slowdown: LEI Index YoY changes pass the peak and begin moderating.
8 World Gold Council. Data as of September 30, 2022.
9 World Gold Council. Data as of September 30, 2022.
10 World Gold Council, State Street Global Advisors. Data as of September 30, 2022.
11 Bloomberg Finance L.P., State Street Global Advisors. Data as of November 30, 2022.
Bloomberg Commodity Index
A broadly diversified commodity price index distributed by Bloomberg Indexes that tracks 22 commodity futures and seven sectors. No one commodity can compose less than 2 percent or more than 15 percent of the index, and no sector can represent more than 33 percent of the index.
MSCI ACWI Index
A market cap weighted equity index that includes both emerging and developed world markets.
FTSE NAREIT All Equity REITS Total Return Index
A free float adjusted market capitalization weighted index that includes all tax qualified REITs listed in the NYSE, AMEX, and NASDAQ National Market.
Bloomberg Global Aggregate Total Return USD Index
A flagship measure of global investment grade debt from a multitude local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
ICE BofA MOVE Index
This is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options.
A way of estimating volatility of a security’s price based on a number of predictive variables. Implied volatility rises when the market is falling when investors believe that the asset’s price will decline over time, and it falls when the market is rising when investors believe that the security’s price will rise over time. This is due to the common belief that bearish markets are riskier than bullish markets.
J.P. Morgan Global FX Volatility Index
JPMorgan Global Volatility index tracks the implied volatility of FX options of a set basket of global currencies.
S&P GSCI Total Return Index
A widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis comprised of the principal physical commodities futures contracts.
Bloomberg U.S. Aggregate Bond Index
A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
Bloomberg U.S. Treasury Index
Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Dollar Index / US Dollar Index (DXY)
A currency benchmark that measures the performance of the US dollar against a basket of currencies: the euro (EUR), the yen (JPY), the British pound (GBP), the Canadian dollar (CAD), the Swiss franc (CHF) and the Swedish krona (SEK). Its shorthand symbol in financial markets is “DXY.”
S&P 500 Index
A market-capitalization-weighted stock market index that measures the stock performance of the 500 largest publicly traded companies in the United States.
Spot Gold Price
The price in spot markets for gold. In US dollar terms, spot gold is referred to with the symbol “XAU,” which refers to the price of one troy ounce of gold in USD terms.
US CPI Urban Consumers NSA Index
Measure of prices paid by consumers for a market basket of consumer goods and services.
VIX Index or CBOE Volatility Index (VIX)
The VIX, often referred to as the equity market’s “fear gauge,” is a measure of market risk based on expectations of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options—both calls and puts. The VIX volatility measure is meant to be forward looking.
The views expressed in this material are the views of the Gold Strategy Team as of December 1, 2022, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
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Investing in commodities entail significant risk and is not appropriate for all investors. Commodities investing entail significant risk as commodity prices can be extremely volatile due to wide range of factors. A few such factors include overall market movements, real or perceived inflationary trends, commodity index volatility, international, economic and political changes, change in interest and currency exchange rates.
Commodities and commodity-index linked securities may be affected by changes in overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, or political and regulatory developments, as well as trading activity of speculators and arbitrageurs in the underlying commodities.