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Gold Midyear Outlook: Interest Rates, Recession, and Risks Propel Gold Higher

Gold Midyear Outlook: Interest Rates, Recession, and Risks Propel Gold Higher

Posted June 15, 2023 at 11:00 am
State Street Global Advisors

By: Maxwell Gold, CFA, George Milling-Stanley, Diego Andrade, Robin Tsui, CPA, CAIA, CA

  • Gold’s prospects in the second half of 2023 remain bright, driven by a shift in monetary policy, the potential for recession, and growing potential for market shocks and volatility.
  • Fundamental demand for gold remains robust led by central bank purchases.
  • Despite nearing its all-time high price in US$, gold may have more room to run as investors shift back into the metal.

Heading into 2023, gold’s prospects looked positive despite muted performance in 2022 and a similar consensus sentiment among market participants. And gold has certainly shone brightly on an absolute and relative basis thus far in 2023: Year to date, gold posted a 7.61% return compared to 7.68% for global equities and 3.03% for global fixed income.1 Over the last 12 months, gold has outperformed both global equities and global fixed income broad indices. Gold also separated itself from the broader commodities universe which, amid moderating inflation and slowing demand, has seen a drop of -11.42% and -24.78% on a year-to-date and trailing 12-month basis, respectively.2

figure 1: gold has led the way among major global assets classes

In our 2023 Gold Outlook, we outlined two key factors as important drivers for gold this year: interest rates and recession. Both factors will continue to impact gold throughout the rest of the year. But the regional banking crisis, the US debt ceiling, and on-going geopolitical turmoil globally have put risk front and center as another catalyst, on par with rates and recession, to continue to support the case for gold for the remainder of this year.

Gold and the Three Rs – Rates, Recession, and Risk

1. Rates: A Shift From Hike to Halt May Benefit Gold

The Federal Reserve (Fed) began its current rate tightening cycle, the most aggressive hiking cycle on record, in March 2022. As the Fed ratcheted up its policy benchmark rates, gold began a sell-off that was exacerbated by four consecutive jumbo hikes of 75 basis points (bps) throughout 2022. But as inflation began to moderate, the Fed slowed the size of its rate hikes in Q4 2022. Gold subsequently bottomed out at US$1622/oz on September 26, 2022, shifted gears, and has since rallied 21%.3

This shift from expected rate hikes to an expected rate halt significantly benefitted gold. The first leg of the current gold rally was driven by expectations of an end to the Fed’s rate tightening cycle. The next leg of the current gold rally likely will come with the rate cut cycle over the near to medium term, pushing real yields lower as inflation remains elevated and sticky. This results in more limited downside for gold as the Fed rate cycle hits pause, expected by the end of this year.

The outlook for the US dollar has softened year to date, following a 20-year high last year. With expectations for slowing US growth and a ceiling for US real interest rates, the dollar may see further headwinds, particularly on a relative basis, with capital flowing to other regions, such as Europe, which continue to increase interest rates.

figure 2: after rebound, gold may move higher anticipating a rate cut cycle

2. Recession: Slowing Growth May Spur Demand for Defensive Assets

With expectations high not only for a US recession but also a global slowdown, gold may shine. It performed well during the seven US recessions since 1973, with an average return of 20.19% (see Figure 3). As such, gold may benefit from anticipation of a US recession, particularly compared to other asset classes.

Current leading economic indicators are nearing levels experienced during previous recessions with global and US growth trends signaling a slowdown amid sticky inflation. Whether the US economy is heading toward or already in a recession is up for interpretation. But it’s important to highlight that, historically, gold not only performs well during economic contractions but also in the periods immediately leading into a recession.

In the six months preceding a US recession, gold has been a clear favorite. During the last seven US recessions, gold averaged 11.32% in the immediate lead up to an economic recession. This makes intuitive sense as investors seek to build defensive positioning ahead of an anticipated growth slowdown.

As for the six months following a US recession, gold averaged 0.51%. Yet underperforming relative to other asset classes should not overshadow gold’s overall risk management characteristics and diversification benefit to portfolios — particularly during economic recovery periods that may still exhibit heightened volatility and persistent uncertainty.

figure 3: pre-recession and recessionary periods have historically favored gold

You can read more about gold and the protection it may provide against recessionary risks in our Midyear ETF Market Outlook, Diversify Recession Risks with Cyclicals and Defensives.

3. Risk: Growing List of Tail Risks Could Help Gold Shine

Market risks are always a focus for gold investors, and 2023 has had no shortage of events to keep investors on their toes. With ongoing uncertainty on the global geopolitical front and recent risk events — including the regional banking crisis and US debt-ceiling debate — driving market volatility, the potential for further unforeseen risk events remains elevated.

Gold has exhibited low correlations to financial assets over multiple market cycles; it also has a strong track record of protecting against both short- and long-term market volatility. Its ability to help protect portfolios against systemic market shocks and tail events stemming from a variety of crises (see Figure 4) may help reduce portfolio drawdowns resulting in potential portfolio performance improvement over time.

Looking at major drawdowns in US equity markets, gold has not only outperformed US equities on a relative basis, but also on an absolute basis in the majority of cases. During peak-to-trough drawdowns greater than 15% on the S&P 500® Index, gold averaged 5.8% total return versus -24.2% total return on the S&P 500 and -21.9% on the MSCI World Total Return Index.And during these 13 drawdown events, gold delivered positive returns in ten of those periods. In the three periods when gold had a negative return, it still reduced portfolio drawdowns and volatility when compared to a portfolio with no gold. Furthermore, gold tends to maintain gains over time even as markets recover.

Figure 4: Gold Stands Out During Market Turmoil Events

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Bloomberg Commodity Index Total Return
A broadly diversified commodity price total return 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.

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.

The correlation coefficient is a statistical measure of the strength of a linear relationship between two variables. Its values can range from -1 to 1.

LBMA Gold Price PM USD
The London Bullion Market Association (LBMA) Gold Price are the global benchmark prices for gold delivered in London. The LBMA Gold Price is determined twice each business day (10:30 a.m. and 3:00 p.m. London time) by the participants in a physically settled, electronic and tradable auction administered by ICE Benchmark Administration Limited (“IBA”).

MSCI ACWI Total Return Index
A market cap weighted equity total return index that includes both emerging and developed world markets.

MSCI World Total Return Index
MSCI World Total Return USD Index is a free-float weighted equity index which includes developed world markets, and does not include emerging markets.

A period of temporary economic decline during which trade and industrial activity are reduced.

S&P GSCI Total Return Index
The S&P GSCI Total Return Index in USD is 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.

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.

Volatility/Standard Deviation
Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured from either the standard deviation or variance between returns from that same security or market index.


1Bloomberg Finance L.P., State Street Global Advisors. Gold price reflects US$/oz spot price, Global Equities: MSCI All Country World Index (ACWI) Total Return, Global Fixed Income: Bloomberg Global Aggregate Total Return Index. Data as of May 31, 2023.
2Bloomberg Finance L.P., State Street Global Advisors. Broad commodities represented by S&P GSCI Total Return Index. Data as of May 31, 2023.
3Bloomberg Finance L.P., State Street Global Advisors. Data as of May 31, 2023.
4Bloomberg Finance L.P., State Street Global Advisors. Data as of May 31, 2023.
5World Gold Council, State Street Global Advisors. Data as of March 31, 2023.
6Kitco, “China keeps buying gold: April’s 8-tonne purchase marks its 6-month shopping spree”, May 8, 2023.
7Bloomberg Finance L.P., State Street Global Advisors. Data as of May 31, 2023.
8Bloomberg Finance L.P., State Street Global Advisors. Data as of May 31, 2023.

Originally Posted June 14, 2023 – Gold Midyear Outlook: Interest Rates, Recession, and Risks Propel Gold Higher


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