Matt Simpson, senior market analyst at City Index, said in his 2023 gold outlook that inflation is likely to remain elevated next year, which could provide a boost to gold prices if demand continues to outstrip supply.
Despite the subdued returns for gold this year, demand for gold has undoubtedly been on the rise.Gold demand so far this year has returned to pre-pandemic levels and is the highest since 2016, according to the World Gold Council (WCC).
Jewelry and manufacturing account for more than half of gold demand, which rose to a four-year high of 1,589 tonnes between Q1 and Q3. In addition, demand in the third quarter rebounded above the five-year quarterly average for the first time since the outbreak.
Demand from China rose 58% quarter-on-quarter over the same period as lockdown measures eased in the second quarter, while demand from India is now up more than 17% year-on-year. The World Gold Council believes demand in India will continue in the fourth quarter as the “wedding season” kicks off.
Gold coins and bars are the second largest source of demand, with annual demand rising to a nine-year high through the first three quarters. Central banks have played a role in supporting gold prices this year as they tend to hold gold coins and bars as reserves.
Soaring inflation has prompted central banks to stockpile gold, making demand for the metal in the third quarter of this year more than double what it will be in 2021. Also, they had record demand in the third quarter.
Gold remains favored by the central bank as a reserve asset, according to the central bank’s annual survey in June. Sixty-one percent of respondents said they expected to increase reserves in the next six months, while just 5% planned to reduce them. They seem to have done just that, adding 31 tons of gold to international reserves in October alone.
While demand is clearly on the rise, it’s worth noting that supply has outstripped demand so far this year. However, since the supply of gold is believed to be inelastic (not readily available), the traditional theory of supply and demand fails.
Therefore, Simpson prefers to focus on the growth of gold demand next year rather than the growth of supply, which will provide support for gold prices at least going into 2023.
A threat to the outlook for gold is that inflation does not fall as quickly as expected and that the final Fed rate will be higher than the 5-5.25% currently projected. That could be bullish for the dollar and weigh on gold prices in the process.
Gold demand from global central banks, China and India is expected to continue to support gold in 2023, Simpson concluded. However, gold’s upside potential should be limited given that the Fed is likely to raise interest rates above 5% and keep them there.
As a result, he expects gold prices to be in a “below average” high-to-low range in 2023. The cycle suggests that gold may have made an important low in September and come under buying pressure in the first half of 2023.City Index’s forecast range for gold prices in 2023 is $1,600-$1,900.
Spot gold daily chart
At 14:18 on December 28, Beijing time, spot gold was quoted at $1810.79 per ounce