Gold News

Gold Price 2023: Will Supply and Demand Matter?

New year, new issues for gold price forecasts...
THROWING rocks at other pundits and space-fillers is all well and good, admits Adrian Ash at BullionVault. And it's relentlessly easy in gold.
But what gaps in our own analysis need filling as well?
Obsessed with investment flows because of their clear correlation with prices, the biggest gap in gold analysis by far is how mining supply might actually have some impact on gold bullion prices as well.
Because "[while] it is difficult to disentangle the influence of supply on precious metals prices from that of macroeconomic conditions," said derivatives exchange the CME's Erik Norland in a series of articles recently, "mining supply appears to have a strong impact on precious metals prices over time."
Chart of annual world gold mine output as a % of existing above-ground stockpiles vs. inflation-adjusted gold price. Source: Erik Norland, CME Group
Cart before the horse, perhaps.
Strong gold prices tend to disincentivize strong output, first because they add value to the mining company's untapped reserves, and also because they enable mining bosses to dig higher-cost seams...yielding less metal...which would be uneconomic at lower prices.
Nevertheless, as gold surged to a peak above $1900 in nominal dollars during the global financial crisis a decade ago, "Mining supply of gold rose in 2009, fell slightly in 2010 and 2011," says Norland.
"[It] then climbed by over 20% between 2011 and 2016" as prices fell almost in half from new record highs, but "gold mining supply [then] fell 7% between 2016 and 2021" as the market rallied and touched a fresh all-time high, first during the Covid Crisis of 2020 and then when Russia invaded Ukraine in early 2022.
Long-term trends in mine supply, therefore, look well worth considering when looking at gold bullion's possible price path in 2023 and beyond.
More urgently, and on the other side of the supply/demand ledger, what about jewellery?
Time and again we have seen and shown how demand for bracelets and necklaces tends to mirror the gold price...
...rising when prices fall and vice versa...
...rather than driving those prices up or down with the clear and powerful impact of investment gold demand.
But it's also clear in both the data and historic patterns that investors in gold shouldn't ignore or dismiss the value of jewellery demand entirely.
Most especially not when gold investment demand and therefore gold prices face a challenge from, say, interest rates rising faster than inflation.
Chart of gross global gold jewellery demand vs. 12-month average gold price in US Dollars. Source: BullionVault
Make no mistake.
Global gold jewellery and tech-use demand hasn't set any new records this year on the data compiled and crunched by specialist analysts Metals Focus and published by the mining industry's World Gold Council.
Indeed, it has lagged its record peak of 2013 by a sizeable margin. But it bears repeating that a) 2013 saw gold prices crash 25%, and b) global gold jewellery and tech-use demand has recovered its pre-Covid levels. It has done so even as the underlying cost of bullion has held around or exceeded its own all-time highs. And it's done so even when we account for consumer-market supply from scrap and re-selling.
Annual average gold prices per Troy ounce. Source: BullionVault
2023, no doubt, will bring fresh challenges and headwinds to jewellery demand, not least in the Asian giants of India and China.
But rather than backing off in 2022 as gold bullion steadied around the highest prices in history, that demand has stabilized after rebounding from the Covid Crisis shutdowns...
...and it has stabilized even as the No.1 consumer, China, has continued to lockdown families, social events and retail outlets in the name of still trying to secure 'zero covid' infections.
Nothing is guaranteed of course, and a steep drop in the global gold price could perhaps meet a drop in Asian and global jewellery demand in 2023.
But historic patterns and trends suggest that this simply isn't how things work. So any investor or fund manager looking for some downside protection in their portfolio might want to consider how gold bullion...
...a strong and repeated diversifier for wider investment holdings...
...looks most likely to enjoy downside protection of its very own right now.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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