Increased demand for jewellery in mainland China and Malaysia will cause gold to soar above $2,000 in 2023.
KUALA LUMPUR, MALAYSIA – Media OutReach – 21 March 2023 – 2022 was a tough year for gold, but in the last three months of 2022 the situation changed radically: net short position in gold was on the low side; banks began to buy gold into foreign exchange reserves; the U.S. economy began to signal a slowdown in inflation, which in turn contributed to a softening of the Fed’s rhetoric. As a result, gold gained bullish momentum and added 13% by the end of the year.
Pic. Net central bank demand in tonnes.
The reason for the increased demand on the part of the central banks is in the geopolitics and significantly correlates with the events in Eastern Europe. During the conflict, information about the freezing of U.S. Treasuries purchased by Russia appeared in the information field. This fact is a precedent showing that the traditional system of foreign exchange reserves does not work. It is therefore quite logical that the central banks of the world have revised the risks: they reduced the share of U.S. Treasuries and dollar cash in favour of physical gold.
Kar Yong Ang, a financial market analyst at OctaFX, believes that ‘due to continued geopolitical tensions and a virtually non-operational foreign exchange reserve system, central bank purchases will remain high throughout 2023 at 1,000–1,200 tonnes’.
Investment demand—potential driver to boost the gold price higher
Growth in demand from the central banks is confirmed by increased investment demand, which rose to 1,107 tonnes in 2022 (+10% YoY) mainly due to higher interest in physical gold. At the same time, withdrawals from gold funds continued in 2022, but were more moderate relative to 2021.
Pic. Jewellery demand in selected countries (2022).
Currently, a key blocker of industrial cycle recovery problems related to COVID lockdowns has disappeared—in early 2023, the Chinese government announced the abolition of zero-COVID policy.
The additional factor in favour of APAC demand growth is the growing demand in local markets. Thus, jewellery demand in Malaysia grew by 24%, in Singapore by 30%, and in Vietnam by 51%. In fact, business cycles in the APAC are moving into an early cycle in which gold mining companies (materials sector) are growing moderately over a 1–2 year interval.
In this regard, Kar Yong Ang expects the economic recovery of mainland China and PRC in particular to boost demand in 2023 by 17% year-on-year (up to 700 tonnes).
Gold supply is stable over years
Overall, gold supply shows a fairly stable picture. Even supply-chains and geopolitical disruptions of 2020–2022 had no statistically significant impact. The compound annual growth rate (CAGR) over the last 13 years is 2.1%. The gold supply increased by 2% in 2022 to 4,755 tonnes, coming very close to the 2018 peak.
Opportunity cost and uncertainty are the key tailwinds for gold in 2023
Apart from the information above, investors need to consider four groups of additional fundamental factors: economic expansion; risk and uncertainty; opportunity cost; momentum / impulse.
From a macro perspective, a good portion of last performance can be attributed to the opportunity cost (weaker US dollar, followed by a drop in the US 10-year Treasury yield).
- According to the OctaFX expert calculations, total physical gold demand in 2023 will increase by 6.3% to over 5,000 tonnes (vs. 4,740 tonnes in 2022).
- Gold price has an upside trend due to the opportunity cost factor—amid the continued weakening of the dollar and a moderate decline in the US 10-year Treasury yield.
- Extremely strong support for gold quotes in 2023 will be due to the risk and uncertainty factor, which will manifest itself in increased demand for physical gold from central banks.
- All these drivers allows forecasting the gold price over $2,000/oz by the end of 2023, which corresponds to a potential increase of +8.3% at the time of writing.
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