Gold is a classic safe-haven asset. Investors have used it for decades to protect their portfolios against inflation and economic crises.

Gold is what’s called a “risk-off” investment. Institutions and individuals turn to gold when they do not want to take risks associated with stocks.

There were plenty of risks to turn away from in 2022. From geopolitical catastrophes such as the ongoing war in Ukraine to aggressive interest rate hikes throwing a wrench into the financial system, investors had plenty of reasons to become more defensive.

Inflation reached levels not seen in decades. In November, annual inflation in the US ran at 7.1%, while the euro area suffered from a 10.1% year-over-year increase in prices.

On top of everything else, the crypto market is going through one of the most difficult periods ever. Year-to-date, bitcoin is down 64%. And the ongoing FTX scandal doesn’t increase investors’ confidence in the crypto area.

Bitcoin was titled “the new gold” and was expected to replace gold as an alternative investment. Now its potential to do that is doubtful.

Should investors buy gold at the end of 2022? And how should they expect it to perform next year?

What Drives Gold Returns?

The most important driver of the price of gold is real interest rates.

The “real” interest rate is the nominal rate minus inflation.

In the US, the real one-year rate is at about 0.7%. Barely above zero, despite the multiple interest rate hikes.

The market expects the Fed to start lowering interest rates next year, potentially in response to a coming recession.

Lower nominal interest rates and recessionary risks are good for gold.

Gold delivered positive returns in five of the past seven recessions, according to the World Gold Council.

These could potentially be the yellow metal’s biggest catalysts in 2023.

And the world’s central banks are buying record amounts of gold.

In the third quarter, they bought about 400 tonnes or 12.9 million troy ounces of gold. This is the highest amount since 2000.

Central banks aren’t the most sophisticated investors (it’s not their mandate to generate investment returns). But they have some freedom to choose when to buy gold and other risk-off assets.

And they are buying gold at record levels.

Slow economic growth in 2023 (which could be one of the reasons for the Fed to start lowering interest rates) is all but certain.

Consensus estimates point to a 2.7% global GDP growth next year. That’s much lower than the post-pandemic 6% growth recorded in 2021 and lower than the 3.2% growth estimate for this year, according to IMF.

This is also good for gold.

Investors Are Reconsidering Gold

Finally, investor sentiment is turning in gold’s favor.

Crypto hasn’t yet proven to be a viable alternative to gold. Even the most well-established cryptocurrencies, such as bitcoin and ether, are suffering from massive volatility. Smaller ones have even less of a claim to replace gold.

Gold, unlike crypto, doesn’t require computational power to support it. It’s as decentralized as assets get. There’s no “gold blockchain.”

You can’t print it, and it doesn’t rust or tarnish for millennia.

As far as investments go, gold is as indestructible as they come.

Experienced investors have always known it. Younger investors are looking for assets that could provide diversification benefits that crypto couldn’t deliver.

From macro factors to investor sentiment, gold is in a good place at the end of 2022.

Thank you for your loyal readership,

The Financial Star team