Gold returned 14.6% in 2023, making it the best preforming year since 2020, when it was strongly boosted by the Covid pandemic and returned more than 26% year-on-year.
Despite a counter-cyclical reputation, gold prices raised in hand with stock markets, increasing its correlation to publicly traded securities. Indeed, gold displayed a 0.39 monthly correlation with the S&P 500 last year. As a comparison the same metric was only 0.07 for 2022 and 0.16 for 2021.
One of the possible explanation is that gold is seen more as a way to insure against volatility, whatever the prevalent trend of the financial markets, rather than just a safe haven in situation of bear markets. Recent tensions in the Red Sea will also contribute to higher gold demand.
Gold prices have soared to unprecedented heights, propelled by a convergence of factors such as alleviating inflationary pressures, tepid labor market indicators, and a more subdued stance from the Federal Reserve. Moreover, escalating geopolitical tensions, exemplified by an incident in the Red Sea, have further enhanced the allure of gold.
Amongst the most influential events for the gold market in 2023, we can note the following:
Inflation concerns prompted increasing emphasis on allocating gold in portfolios, as it is still considered by many as a reliable long-term hedge. Conversely, tighter monetary policies expectations drove a correction in Q3. In essence, an increase in bond yields can reduce the allocation of funds to gold as bonds become a more appealing investment. However, higher rates did not influence gold prices for too long, mainly because central banks bolstered an increased demand for gold, notably in emerging Asian economies according to the World Gold Council.
Geopolitical tensions with the lasting Ukraine-Russia war and the burst of the armed confrontation between Israel and Hamas. More than a hedge for high inflation, gold is also seen as a hedge for the “doomsday” scenario. While such scenarios may currently seem distant, they possess the potential to instigate disruptions within the supply chain, lower the overall confidence in financial institutions and spread fear to retail and institutional investors. Tensions also pushed China to bolster its gold purchase over 2023 (+30% in 2023) at 225 metric tons, the highest since 1977, to hinder inflation and reduce their reliance on the dollar. Poland and Singapore are completing the podium in 2023 with respectively 130 and 75 metric tons.
The March banking crisis in the United States, which shook the sector, resulted in the bankruptcy of prominent institutions such as the Silicon Valley Bank, the Silvergate Bank, and the Signature Bank. These events significantly undermined investor confidence, further fueling the momentum of the early-year rally in gold prices as demand for tangible assets surged.
Looking forward, the general sentiment on gold seems bullish for the coming year with some expectations for the gold price to be close to $ 2’150/Oz by year-end (UBS, World Gold Council), with an expected all time high by mid 2024 (JP Morgan), given that the US fed cuts down interest rates amidst slowing inflation. Amidst the incessant armed confrontations, highlighted by the recent Red Sea affront, investor appetite for longterm value storage is poised to escalate, with gold being the trivial choice in this regard.