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Gold in 2023: Factors Influencing its Performance

By Nicholas Frappell, Global Head Institutional Markets, ABC Refinery

Gold in 2023

Gold made a strong start to 2023, making gains of US$220 before reaching a high – as of late April – of US$2,048/oz. This strength took place against a background of tightening central bank policy that might otherwise be expected to drag on gold prices.

The Dollar and Gold

Instead, a secular decline on the dollar that peaked in Dollar Index terms in September 2022 drove a substantial rise in the USD gold price. That Dollar weakness is – in very broad terms – expected to continue through the rest of this year and into next year as markets work on the expectation that US rates have peaked and that the US will be the first major economy to ease. In addition, the broad Dollar cycle pointed to a peak in the latter half of 2022, followed by an extended move lower. So far, the Dollar Index or DXY, has fallen by almost 14% from the September 2022 high. This should provide a solid underpinning to gold’s performance this year.

Real Rates and Gold

In contrast to previous years, real rates – or approximations of them – have not been as significant a driving force in gold’s price behaviour or as an explanatory variable for changes in the price. Real yields are significantly higher, yet gold too has risen, and recent range-bound yields have borne less of a relationship with the rising gold price.

Spot gold and 10 year inflation-linked US yields

Spot gold and 10 year inflation-linked US yields​
Source: Bloomberg, LBMA, ABC Refinery

What might explain this? A plausible answer is that official sector buying took place during a period of rising real rates, which tend to de-couple the long standing and robust relationship between gold price changes and real rates, as modelled via Inflation-linked Treasury notes.

The Banking Sector and Gold

A run on a hitherto not very well-known US bank in Santa Clara led to significant volatility in fixed income combined with fears of systemic risk to the financial system both within America and the Eurozone. The takeover of Silicon Valley Bank (SVB) by US authorities on March 10 led to a substantial downgrading of the expected pathway of policy rates, helping gold rally hard from US$1,810 to US$2,048 in little over a month.

The demise of SVB and a small number of other US banks was followed by real fear over the financial stability of Credit Suisse, a G-SIB or “Global Systemically Important Bank” whose resolution by Swiss authorities has created a postmerger UBS with a balance sheet double the size of Swiss GDP, and perhaps a lifetime of litigation over the treatment of junior bondholders.

CME Net Managed Money position, VWAP and USD price

CME Net Managed Money position, VWAP and USD price​
Source: Bloomberg, CME, ABC Refinery

The fundamental arguments of whether rates have risen far enough to tame inflation and whether Terminal Rates can and should go lower, or whether rapidly rising rates have affected bank stability and financial conditions and need to pause or turn lower, should be one of the defining issues of mid-2023.

THE FED FACES A POTENTIAL TRAP WHEREBY TIGHTENING REMAINS NECESSARY, BUT AT THE RISK OF THE STABILITY OF THE BANKING SYSTEM.

These arguments matter because they drive rates markets and ultimately all asset markets, including gold. The Fed faces a potential trap whereby tightening remains necessary, but at the risk of the stability of the banking system. Or it may face a more benign outcome whereby financial conditions tighten as banks seek to bid for deposits in competition with short-term bills, and this tightening does some of the Fed’s work for it, allowing the FOMC to steer a less restrictive and less risky pathway forward.

We will all know a good deal more about this by the time of publication as the Fed has stated that the impact of interest rate rises on banking stability and financial conditions will be analysed even more closely in May this year.

What can be said is that the round of banking instability that we witnessed in March cannot be said to be over, with some medium and smaller banks facing outflows of depositor funds in the US and similar headwinds in other major economies.

Gold and the official sector

A second question begging for an answer in 2023 is this: how will the official sector act towards gold?

Last year was an astonishing performance as the official sector purchased 1,136 tonnes of gold, with about 850 tonnes falling in the last half of the year alone (WGC, Metals Focus).

As the World Gold Council has pointed out, this figure is an outlier compared with historic data that it is sensible to think that a repeat in a subsequent year is highly unlikely. However, it is worth bearing in mind that all institutions have the capacity for herd-like behaviour, and just as the 1990s demonstrated the extent to which reducing official holdings of gold became entrenched among many central banks, the notable increase in buying in 2022 may herald a trend change in the willingness of the official sector to diversify into gold, particularly as rates pivot and the official sector collectively rebalances their portfolios. Official sector buying in January and February 2023 totalled 158 tonnes, which exceeds the Q1 number for last year.

The two important points here are firstly the importance of the official sector as an important factor contributing to gold demand (24% of total demand last year, according to WGC data) and less importantly perhaps, that for those trying to map out the price of gold, the impact of real rates on the gold price may continue to be somewhat muted, with the dollar and perhaps Crude being more reliable factors in determining gold’s path.

Central bank gold purchases – quarterly, versus daily US 10 yr TIPs yield

Central bank gold purchases – quarterly, versus daily US 10 yr TIPs yield​
Source: World Gold Council, Metals Focus, Bloomberg, ABC Refinery

Gliding Towards Grey Swans…

In 2023, there are at least two economic “grey swan” – events that are visible to observers and not completely unexpected, but whose timing and impact are difficult to predict. Japan’s exit from Yield Curve Control (YCC) is one such event that “may” be handled smoothly but is more likely to drop another large stone into the world pond of rates and FX, with the potential to affect Japan’s banks and reverberate through both developed and emerging markets.

The second event is the US debt ceiling. The partisan nature of domestic US politics and divided control over both the Lower and Upper Houses are likely to make resolving the ceiling a difficult task. Any delay in resolving the issue will create uncertainty. Currently, 1-month Treasury bills are heavily in demand relative to 3-month bills as money managers fret over bills maturing during the “peak debt ceiling” period.

Importantly for gold, a delay will lead to an increase in the supportive policy measures undertaken by the Federal Reserve. These measures*, such as increasing liquidity, injecting reserves, and possibly ending quantitative tightening (QT) and swinging back to quantitative easing (QE), should be positive for gold.

The paradox for gold and other assets in 2023 may prove to be the disconnect between the overt tightening of policy rates and the provision of substantial amounts of liquidity that act in opposition to one another, with the latter being harder to trace in real-time.

Summary

The expected relative weakness of the US dollar and the possibility of an economic slow-down as both policy and bank conditions tighten suggest a strongly supportive environment for gold.

AT THE TIME OF WRITING, GOLD IS IN A BULLISH TREND ACROSS MEDIUM AND LONGER-TERM TIME FRAMES.

At the time of writing, gold is in a bullish trend across medium and longer-term time frames. Everyone will be acutely aware of the “double top” at US$2,075. A break above that level opens the way for gold to extend (in the longer-term) towards the US$2,400~2,500 levels.

The tense geopolitical backdrop plays to gold’s strengths as a risk diversifier; however, the impact of ongoing tensions is even harder to predict, let alone measure, than all the many other influences on gold.

ABC remains a constant in these challenging markets, with ABC Bullion supplying bars to customers from the LBMA, SGE and CME-accredited ABC Refinery, a cornerstone of the refining sector in Australasia. ABC provides internationally accredited bars, refining services and information on precious metals markets to clients and the rest of the world.

(* minutes of the FOMC Conference Call, October 16, 2013)

Please be advised that this article reflects information as of 28 April 2023, and circumstances may have changed since its writing.

NICHOLAS FRAPPELL
NICHOLAS FRAPPELL is the Global Head Institutional Markets at ABC Refinery. He has extensive experience in precious metals trading, having worked in London, Tokyo, Singapore, Hong Kong, and Sydney. Nick holds a Masters in Finance from the University of London and a Diploma in Technical Analysis from the UK Society of Technical Analysts, and is the Chair of the LBMA membership sub-committee. He also co-hosts the ABC Refinery “Pod of Gold” podcast and will speak at the APPMC Conference on the Precious Metals Price Outlook Panel.
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Lee Jia Yi

OPERATIONS & ADMIN EXECUTIVE
Before joining SBMA, Jia Yi worked as an Admin & Reporting Officer in her previous role. She holds a Diploma in Business & Social Enterprise from Ngee Ann Polytechnic. Jia Yi is responsible for managing and maintaining physical and digital files in SBMA, supporting invoicing processes, reconciling receivables and payables, coordinating meetings and conferences. Additionally, she will provide support to the team and assist the Business Director in managing the Association’s office operations and general administrative activities.

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Emily Oh

OPERATIONS & ADMIN EXECUTIVE
Emily Oh is the Operations & Admin Executive, a seasoned professional who values teamwork and effective communication. She is skilled at adapting to new challenges and takes a proactive and resourceful approach to every task. Before joining SBMA, Emily had experience coordinating international travel arrangements and spearheading community initiatives. Her role at SBMA will be providing operational and administrative support for projects and other matters to the team.

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Clara Chang

MARKETING & COMMUNICATIONS EXECUTIVE
Clara Chang joins SBMA as the Marketing & Communications Executive, enriching the team with her extensive experience in content creation, social media management, and digital marketing. Prior to joining SBMA, Clara held the position of Marketing Executive at her previous job. She holds two bachelor’s degrees from the University at Buffalo, one in International Trade and another in Geographical Information Science. Her core duties will include maintaining the SBMA website, managing the quarterly Crucible newsletter, among other responsibilities.

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Mr John Levin

Global Metals
TD Securities
John Levin is the Head of Metal Sales & Trading – APAC at the Toronto Dominion Bank’s Singapore office. Prior to this role, he devoted seven years to leading precious metal sales for the ANZ banking group in his home country, Australia. Notably, from 2009 to 2011, John played a significant role on the management committee of the London Bullion Market Association while serving as the Head of Precious Metals Sales for HSBC Global Banking and Markets in the UK.

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Fabian Lew

MARKETING & COMMUNICATIONS OFFICER

Fabian was a Business Development and Marketing Associate before joining SBMA. He graduated from Singapore Management University with a Bachelor’s degree in Economics.

He has joined SBMA since February, 2022.

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Margaret Wong

BUSINESS DIRECTOR

Margaret Wong, Business Director at SBMA (Singapore Bullion Market Association), brought valuable experience from her previous role at the World Gold Council (WGC). Her tenure at WGC provided her with extensive exposure to the gold community in Singapore and the broader region. This background has been instrumental in establishing strong working relationships within the industry.

Margaret’s role at SBMA encompasses a diverse range of responsibilities. She oversees office management, business support processes, finance, and administrative functions essential for the smooth operation of the team and management committee. Additionally, Margaret handles membership matters, member communications, and addresses public inquiries related to SBMA.

One of Margaret’s key responsibilities is coordinating with the Event Management Company for SBMA’s prestigious annual event, the Asia Pacific Precious Metals Conference. This flagship conference plays a crucial role in the industry, making her involvement pivotal in its success.

Described as resourceful and self-motivated, Margaret Wong brings a wealth of skills and experience to her role at SBMA, ensuring efficient operations and effective engagement within the precious metals community in Singapore and beyond.

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Albert Cheng

Chief Executive Officer

Albert Cheng joined the World Gold Council in March 1993 as a Regional Manager, becoming Managing Director, Far East in 2003. He retired at the end of March 2015 and was subsequently named its Advisor. He has also been an International Advisor to the Shanghai Gold Exchange since 2002.

His marketing career began with Dentsu Young & Rubicam, Hong Kong in the early 80’s. He began gold marketing in July 1985 when he joined the Royal Canadian Mint as a Regional Manager for Southeast Asia.

He was appointed honorary CEO of SBMA in November 2015. He is responsible for the success and strategic development of SBMA, represents the interests of the Association, and is responsible for all the legal and regulatory aspects of the work of the Association. He is the primary contact for regulators and government bodies on bullion market development.

Ms Pawan Nawawattanasub

Ms Pawan Nawawattanasub

CEO
YLG Bullion Singapore Pte Ltd

Pawan is the CEO of YLG Bullion Singapore and founder of YLG Bullion International. She has almost 40 years of experience in the jewellery industry and established YLG in Thailand in 2003. In 2012, she brought YLG to Singapore. She sits on the Board of Directors of the Thailand Gold Traders Association, the Thailand Futures Exchange’s Arbitration Committee, and the Rotary Bangkok committee. She holds a master’s degree in Political Science.

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Mr Shaokai Fan

Head of Asia-Pacific (ex China) and Global Head of Central Banks
World Gold Council
Shaokai Fan is the Global Head of Central Banks at the World Gold Council, responsible for advising governments on gold matters, and enhancing the gold market through engagement, dialogue, and thought leadership. He works directly with central banks and sovereign wealth funds on investment considerations. Prior to this position, Shaokai held multiple roles at Standard Chartered Bank, including Director for Asia Strategic Initiatives and Associate-Director for Public Sector coverage. Shaokai holds a Masters of Public Administration from Columbia University and the London School of Economics, and an undergraduate degree in finance and economics from New York University.

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Mr Alan Liew

Head of Bullion & Commodities Trading
United Overseas Bank Limited
Alan is Head of Bullion and Commodities Trading for Group Trading in Global Markets, United Overseas Bank (UOB). Alan joined UOB and started the bank’s commodities trading business in 2014, previously he spent eight years in Standard Chartered Bank (SCB) trading both precious and base metals. During his tenure at SCB, he obtained the SGE gold trader licence and was part of the pioneering team for the SGE business and the FX quantitative trading team. Prior to trading, he worked for Monetary Authority of Singapore in the Financial Risk Management Division. He holds a BSc (Hon) in Computer Science at National University of Singapore and a MSc in Financial Engineering at Nanyang Technological University.

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Mr Nikos Kavalis

Managing Director
Metals Focus Singapore Pte Ltd
Nikos Kavalis is a founding partner of Metals Focus. He has over 20 years of experience in precious metals, having previously worked for the Royal Bank of Scotland and GFMS. Since September 2019, Nikos has been based in Singapore, where he also runs the local subsidiary of Metals Focus.

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Mr Nuttapong Hirunyasiri

CEO
MTS Gold Global Trading Pte Ltd
Nuttapong Hirunyasiri is the CEO of MTS Gold Group, one of Thailand’s top 10 companies and top 3 bullion companies. He started MTS Gold Group’s first overseas office in Singapore and has been expanding the group business internationally. He focuses on product development and innovation for gold investment, with the aim of being a leader in providing the full suite of gold investment services in the ASEAN region.

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Mr Raman Walia

Executive Director, Head of Commodities Sales – APAC
JP Morgan Chase Bank N.A.

Raman is Executive Director and Head of Commodities Sales, APAC, for J.P. Morgan. He joined JPMorgan in 2008 in New York, moved to Singapore in 2011, and helped expand the precious metals business in the region. Raman has an MBA from Cornell University, and likes to travel in his spare time.

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Mr Andrew Clarke

Head of Brink’s Global Services
Brink’s Global Services Pte Ltd

Andrew Clarke is the Head of BGS (Brink’s Global Services) for Singapore, Indonesia, Malaysia and Brunei. He has held various leadership positions throughout his career in secure logistics and risk management with Brink’s, which started in Hong Kong in 2010. Andrew relocated to Singapore in 2018 to expand the precious metals line of business along with Brink’s portfolio of services and industries.

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Mr Kazuya Naoki

Head of Metals, Asia
ICBC Standard Bank Plc, Singapore Branch

Kazuya (Kaz) Naoki is the Head of Metals, Asia of ICBC Standard Bank in Singapore and is responsible for the precious & base metals sales and trading in the region. He joined Standard Bank Plc Tokyo Branch in 2008 and was relocated to its Singapore Branch in 2013 whose controlling stake was acquired by the Industrial and Commercial Bank of China in 2015. Prior to joining Standard Bank, Kaz spent 11 years focusing on commodity trading and risk management with Mitsui & Co in Tokyo, Sydney and London. Kaz has been serving on the SBMA Management Committee since 2016.

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Mr Vinh Nguyen

Head of Precious Metals, Asia
StoneX APAC Pte Ltd

Vinh Nguyen joined StoneX Group in Singapore at the beginning of 2008 and responsible for its APAC precious metals activities since 2019 until now.

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Mr KL Yap

General Manager, Singapore Refining Business Unit
Metalor Technologies (Singapore) Pte Ltd
KL YAP is the General Manager of Metalor Technologies (Singapore) Pte Ltd’s Singapore Refining Business Unit. He joined Metalor in 2013, initially in Refining Sales. In 2014, he became Refining Business Unit Manager, leading the development of a new precious metal refinery. KL was Vice Chairman of SBMA from 2017 to 2021, now serving as Chairman. With a degree in business commerce, finance, and marketing, he brings prior experience from refinery and heavy industries.