Year of inconsistent forces, 2022

Gold posted a small gain in 2022, no mean feat given an unprecedented rise in rates and a strong US dollar. 2022 was a textbook example of gold’s stable and uncorrelated performance amid market turbulence. Weak institutional demand was offset by retail investment, driven by inflation and geopolitics, and central banks had an exceptional year of net buying.

Developments since the launch of the 2023 outlook have been consistent with the markets’ consensus scenario, but with a nod to a more severe downturn which could continue to be gold positive. A 3% gain in December took gold to US$1,814/oz, cementing a y-o-y gain of 0.4%, something that looked unlikely to many just two months ago. A strong start to December set the tone for gold to make a series of highs and higher lows over the month. Available demand data shows that gold was supported by a solid gain in COMEX futures net long positions. ETF investors were more cautious but the consistent outflows experienced since May were absent.

While there was a positive return in December to a weaker US dollar, other factors such as futures positioning and rates largely netted each other out. The US dollar index (DXY) fell below its 200-day moving average for the first time since June 2021, signalling perhaps that its reversal since late September is gathering momentum. The strong move lower in the DXY appeared to be a major contributor to gold’s recovery in Q4.

Strong retail and exceptional central bank demand offset weakness from institutional investors made it a year of inconsistent forces. Gold prices posted a small gain in a year when real yields (10-year TIPs) rose an unprecedented 250bps and the dollar gained over 8%. The previous largest annual rise in yields was 150bps with a flat dollar. That year - 2013, saw gold prices fall almost 30%. 2022 provided a textbook example of how diverse sources of demand and supply can counterbalance one another and provide gold with its uniquely stable portfolio-additive performance.

Institutional (ETFs/OTC/Futures) demand was weak but retail demand was strong and central bank net buying exceptional. Together, these counteracting sources of demand and supply drove gold to a marginal gain in 2022.

The US 10-year Treasury Inflation-Protected security (TIP) yield, a proxy for real interest rates and the opportunity cost of holding non-yielding gold- has historically been a reliable higher frequency driver of gold prices for two decades but has been less stellar over lower frequencies.
The consistent inverse relationship would have suggested a steep fall in gold as yields rose over 250bps in 2022. But the relationship only held intermittently. The strong US dollar (+8%) as proxied by the DXY index should have proved equally challenging, given the historically negative relationship. Yet, it also failed to drag gold down over the full calendar year.

Gold’s resilience in 2022 was a result of its often-ignored multifaceted sources of demand and supply. The confluence of these opposing forces not only took gold to a small gain in 2022, but allowed its volatility to remain close to its long-term average of c.16% - for a 60/40 equity-bond portfolio which experienced one of its most volatile years. Although gold’s correlation to a 60/40 portfolio was higher than its average (2.1), along with the correlation between equities and bonds, it remained low at 20, an indicator of gold’s characteristic as a consistently reliable diversifier during market turmoil.

Furthermore, weak institutional investment demand was a visible headwind for gold in 2022. Aggressive monetary policy in most Western economies and a strong safe-haven bid for the US dollar conspired to reduce interest in ETFs, futures and OTC investment. The question many commentators posed was why gold didn’t fare better, given multi-decade high inflation.

The answer is two-fold: First, long-term inflation expectations remained conspicuously well anchored in 2022, suggesting that investors were confident that central banks could control inflation. Second, institutional and professional investors are likely more interested in how they are compensated for inflation, and hence take more cues from monetary policy than inflation developments.

High prices and geopolitics drove strong retail investment. Counteracting this institutional malaise, retail investors were solid buyers of gold in 2022, with y-t-d demand in Q3 at an eight-year high. It is suggested that retail investors, especially in Emerging Markets which make up about 60% of the sector , are more wary of inflation, as well as the level of prices – given scant access to protection. Particularly for non-US investors, gold proved a lucrative investment in 2022, gaining well in their local currencies. In Europe and the US, retail investment stayed buoyant in the face of and heightened geopolitical risk.

Exceptional central bank buying provided also a further boost. Arguably the most surprising development in the gold market in 2022 was the level of demand from central banks. By the end of Q3, 673t had reportedly been added to reserves, a historical high. In October and November, additions continued but at a slower pace. A substantial portion of those additions remains unreported making it difficult to determine the date of purchase, but the scale of buying would likely have supported the price of gold in 2022.