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A relatively dull economic scenario shines bright for gold. But in the case where business confidence is restored and spending rebounds (soft landing), then the yellow metal loses its shine vis-a-vis the investors, as per a World Gold Council (WGC) report.

The WGC said that the global economy is at an inflection point after being hit by various shocks over the past year.

The biggest was induced by central banks as they stepped up their aggressive fight against inflation. This interplay between inflation and central-bank intervention will be key in determining the outlook for 2023 and gold's performance, the report notes.

"The global economy is facing a crossroads, as major central banks continue their efforts to stifle inflation. Gold's performance in the new year will be shaped by the intertwining effects of economic growth, interest rates and inflation, in addition to the influence of geopolitics and the still-strong US dollar," Jaun Carlos Artigas, Global Head of Research said.

According to him, the economic consensus indicates weaker global growth alongside declining - but still elevated - inflation, in addition to minimised rate hikes in most markets.

"Amid those conditions, the 2023 outlook for gold is one of stable performance, especially given its role as both a consumer good and investable asset. However, there is considerable chance that central banks will over-tighten, leading to a more acute recession. In this scenario, gold's value as a long-term, strategic investable asset will come into focus, given it has delivered positive returns in five out of the last seven recessions," Artigas said.

The report notes that economic consensus calls for weaker global growth akin to a short, possibly localised recession, falling - yet elevated - inflation, and the end of rate hikes in most developed markets.

This environment carries both headwinds and tailwinds for gold.

According to the WGC, a mild recession and weaker earnings have historically been gold-positive. A further weakening of the dollar as inflation recedes could provide support for gold.

Similarly, geopolitical flare-ups should continue to make gold a valuable tail risk hedge and an improvement in economic growth of China next year would boost gold demand, said the WGC.

The pressure on commodities due to a slowing economy is likely to provide headwinds to gold in H12023. Long-term bond yields are likely to remain high but at levels that have not hampered gold historically, said the WGC.

A mixed set of influences implies a stable but positive performance for gold.

That said, there is an unusually high level of uncertainty surrounding consensus expectations for 2023, the gold body said.

For example, central banks tightening more than is necessary could result in a more severe and widespread downturn.

Equally, central banks abruptly reversing course - halting or reversing hikes before inflation is controlled - could leave the global economy teetering close to stagflation.

Gold has historically responded positively to these environments.

On the flipside, a less likely 'soft landing' that avoids recession could be detrimental to gold and benefit risk assets, the WGC said.

According to the report, the strength in income-driven consumer demand would be offset by weaker institutional investment. Some retail investment could abate on higher confidence, but lingering inflation would unlikely result in a material drop.

"The case for a soft landing hinges largely on hard economic data not yet confirming the case presented by soft economic data," the WGC report notes.

"While a soft-landing won't be great for gold, it is unlikely to be synonymous with a 'Goldilocks' environment (ideal economic state) until at least H22023, which we see as a remote risk," the WGC said.