Suki Cooper

Many of the themes that dominated in 2022 are likely to cast a shadow in 2023, including uncertainty surrounding COVID, China’s reopening and lacklustre ETF demand. However, macro factors remain central, predominantly the softening of the US dollar, falling real yields and continued robust interest from the official sector. Upside risk has been compounded by speculative interest turning positive and strong interest from China’s reopening ahead of the Lunar New Year. We expect the US dollar to weaken and bond yields to fall, but gold appears to have priced in much of this risk early.

Currently, those not participating in the rally and shying away from elevated prices include ETF holders; these traditionally represent longer-term interest in gold compared with tactical interest and consumers in India. Strength in central bank buying and China’s demand has more than offset lacklustre ETF flows, but the market has also largely priced in the positive impact of China reopening.

Tactical interest remains relatively light and has scope to grow, but the positive effects of China’s reopening and official sector buying may be an H1 2023 phenomenon. Gold is likely to extend its gains if the US dollar and real yields fall further, but if equity markets also extend their rally, there may be limited space for gold within portfolios. We believe that barring near-term upside risk, gold is likely to come under pressure as rates fall, but not as quickly as the market anticipates.

Top three drivers for the gold price in 2023: For the complex as a whole - US dollar weakening further, major Central Banks pausing rate hikes and switching to cuts in H2 2023, and recession risks and growth recovery in H2 2023. For supply and demand dynamics in particular - the uncertainty surrounding COVID-19 and China’s reopening, Russia’s invasion of Ukraine, and power shortages in South Africa.

Silver has followed more closely in copper’s footsteps rather than gold’s in recent months, but this year, we believe it is likely to benefit from the more positive macro backdrop, with the US dollar weakening and China’s reopening. The risk of a recession – even a shallow one – could limit industrial growth across North America and Europe, but retail demand is likely to remain strong amid the uncertainty. One potential hurdle for silver stems from a potential equity market recovery, where retail demand may pivot away from silver in search of better returns elsewhere. In such a scenario, silver’s upside risk is likely to become more limited. However, with China’s reopening and as growth improves in H2, industrial demand led by the photovoltaic sector, electrification of vehicles, and 5G devices and networks should continue to cushion the downside. We also expect the pace of ETF outflows to slow this year.

Both the fundamental and macro outlook appear more positive for platinum in 2023; however, similar to gold, tactical and ETF investor opinion is divided. For the fourth year in a row, platinum prices have kicked off the year on a positive note, but we believe we are more likely to see sustained upside risk in the second half of the year. The three key factors to watch in 2023 are: (1) South Africa power outages, (2) an acceleration in the pace of switching in PGM loadings and (3) signs of ETF outflows stabilising. China has been a keen importer of platinum and as the economy reopens, light will be shed on how much of the demand has been driven by stock replenishment compared with the growing demand for platinum in autocatalysts in light of palladium substitution. A combination of tighter emissions standards, improving microchip availability and growth in vehicle sales suggests autocatalyst demand growth is likely to overshadow jewellery demand weakness. Equally, supply growth remains vulnerable in 2023 despite a build in stocks in 2022, given the heightened risk of power outages. A key risk to our outlook stems from ETF flows that have swung supply and demand balances on numerous occasions for platinum.

We continue to forecast a deficit market for palladium in 2023, but serial deficits are likely to draw to a close. Palladium faces similar supply constraints as platinum given the risk of power outages in South Africa, but as auto production improves, the availability of secondary supply from spent autocatalysts should also recover. However, palladium’s demand recovery faces additional obstacles compared with platinum. While the bounce-back in autocatalyst demand on the back of easing microchip shortages and tighter emissions standards theoretically bodes well for palladium, electric vehicles’ growing market share and the declining share of gasoline vehicles is likely to limit palladium demand growth. This is likely to be the start of palladium’s market share falling. Any palladium switching from rhodium is unlikely to offset the replacement of palladium with platinum. Short-term investors remain sceptical towards palladium, but ETF positioning is already light, having scaled the lowest levels since inception in 2022. Should substitution take place at a slower-than-expected pace, a rebound in investor interest could see palladium prices rally quickly.