Gold during 2023.
Throughout 2023, gold displayed remarkable behaviour amid escalating interest rates, leading to higher real rates and an increased attraction of investors towards bonds and deposits, offering more favourable yields. Concurrently, the equity market, as illustrated by the 25% surge in the S&P500 index, performed well. Surprisingly, gold also exhibited positive performance, reaching historic highs. However, this good performance was in the second half of the year, reversing declines seen in the first half, as the end of rate hikes started to be factored in.
In the latter part of 2023, when a surge in gold prices, there was general awareness that the Federal Reserve intended to lower rates in 2024. At the same time there is an increase in geo-political tensions to deal with. This anticipated shift enhances the allure of gold, given the inverse relationship with falling interest rates. The decline in interest rates results in reduced yields on short-term government bonds, a secure asset competing with gold, thereby augmenting the precious metal's attractiveness. Additionally, this shift leads to lower returns on cash, pushing investors to actively seek more attractive alternatives. When interest rates fall due to an economic slowdown or recession, stocks often perform poorly, and the economy is still at recession risk. Furthermore, the United States presidential elections in November 2024 contributed to heightened political uncertainty, further elevating gold prices. These factors collectively constitute the primary drivers behind the heightened demand for gold experienced throughout the second half of 2023.
Gold prices were supported by sustained demand from Central Banks in response to ongoing economic tensions. Central banks robustly accumulated gold reserves, acquiring approximately 800 tonnes in the first three quarters of 2023, reflecting a 14% increase compared to the corresponding period in the previous year. Projections suggest a strong total annual demand for gold in 2023. In 2022, central banks increased their purchases also by 152%, to over 1.136 tons.
On the investor front, the latter part of 2023 witnessed significant capital inflows into gold. This surge could be attributed to a strategic move by investors seeking to hedge against inflation, which remained above its target and experienced a rebound in both Europe and the US in December 2023. It may also be a pre-emptive response to a potential economic downturn (soft and short recession) and anticipation of Central Banks implementing rate cuts in the coming year. Investors were looking to protect themselves from stubborn inflation, a possible recession, geopolitical tensions and increasing default risks in the financial system.
In summary, gold demonstrated resilience throughout the past year, proving to be a reliable hedge in various scenarios. Whether in response to the conflict in Ukraine and Russia, attacks by Hamas on Israel, increasing inflation, declining real rates, or the Federal Reserve's indication of expected rate cuts in 2024, gold saw price increases, reaching record levels in certain instances. This diversity of scenarios highlights gold's versatility as a hedge.