According to a market strategist, now is the time for investors to look at establishing a strategic position in the gold market. BCA Research commodity analysts say rising geopolitical tensions could provide critical support for gold.
“This is a challenging environment for gold”
Ronald-Peter Stöferle, managing partner and fund manager at Incrementum AG and co-author of the annual In Gold We Trust report, expects gold to decline in the near term as markets begin to price the Fed’s more aggressive monetary policy moves. Persistent high inflation has prompted markets to price a 21% probability that the Fed will raise interest rates by 50 basis points next month. These shifting expectations pushed US two-year yields above 4.6%, the highest level since 2007.
At the same time, cryptocoin.com As you follow, one-year bonds yield over 5%. Stöferle notes that real bond yields are currently seeing positive returns, considering inflation expectations. “This is a challenging environment for gold and I expect to see more downside risks in the next few weeks,” he says.
“It is not possible for any central bank to remain a hawk”
The comments come after April gold futures ended last week in neutral territory at around $1,850. Markets were closed on Monday for the Presidents Day long weekend. However, Stöferle adds that despite the selling pressure, the gold market continues to show relative strength. He explains that he sees the price action and resilient strength in gold as the market’s call to the hawkish rhetoric of central bankers.
The rise in shorter-term bond yields pushed the inverted yield curve to its widest level in 40 years. Stöferle says this market trend shows that it’s only a matter of time before the US enters a recession and that the Federal Reserve has had to loosen its aggressive tightening. Stöferle also notes that he expects the Fed to quickly ease interest rates as soon as unemployment starts to rise. In this regard, he makes the following statement:
We said the 2022 “In Gold We Trust” central bankers were pigeons dressed as hawks, and nothing we’ve seen has changed that view. As soon as credit markets contract, the Fed or any central bank is unlikely to remain hawkish.
“Gold prices are on track to close the year above $2,000”
While there is growing optimism in the market that the US can avoid a recession, Stöferle says many investors underestimate the lag time in monetary policy. He adds that the Federal Reserve has already made the policy mistake and it’s only a matter of time before something goes wrong. The Federal Reserve not only increased interest rates by 450 basis points in this tightening cycle, but also shrunk its balance sheet by $500 billion. Stöferle states that it is only a matter of time before the economy feels the effects of decreasing liquidity in the market. He explains his views on this matter as follows:
It’s like being in a room that loses oxygen. You may not notice anything at first, but then it becomes difficult to breathe. Soon, you’re running to the exits, hoping to get out before it’s too late. Not only is the risk of a recession increasing, but I think we could see a major financial crisis.
In this environment, Stöferle says, it is time to take advantage of falling gold prices and establish a strategic position ahead of the second half of the year. He adds that one strategy investors should look at is to build a position through cost averaging, where you want to buy at successively lower prices. Despite falling prices in the near term, Stöferle states that gold prices are on their way to close the year above $2,000.
BCA raises year-end gold price target to $2,000
In a research note published late last month, Montreal-based research firm BCA Research says it has raised its year-end gold price target to $2,000 as wartime economies begin to form in the West and the risk of ‘financial domination’ continues to rise. BCA chief commodities and energy strategist and lead author Robert Ryan comments:
Once monetary authorities fix interest rates at low levels, the risk of fiscal dominance will intensify as government policy driven by environmental and defense imperatives continues to expand in the West.
Ryan notes that the increase in geopolitical uncertainty comes as economic conditions continue to worsen. Nor does he expect the Federal Reserve to raise interest rates above 5% this year in the current environment. At the same time, BCA expects the ongoing conflict in Ukraine to continue to distort commodity prices, keeping inflation high. Ryan adds that market disruptions, Western countries’ commitment to developing green energy infrastructure, and rising defense spending are factors that will continue to support high inflation.
“Investors will flock to gold as a safe-haven investment!”
Analysts predict headline inflation will hover between 4% and 5% over the next few years. Analysts said in the report, “Commodity prices will continue to be volatile this year as governments, especially the EU, intervene in the markets. If Russia’s position in the war deteriorates, Putin and his government may become irrational actors and take more extreme measures. One of these involves cutting off the global supply of crude oil and/or petroleum products resulting in a global oil supply shock. “With global uncertainty high and US real interest rates low, investors will flock to gold as a safe-haven investment.”
Another positive aspect of gold in an environment of heightened geopolitical tension is its growing influence on the US dollar. The BCA sees a marginal increase in petro-yuan trade as countries buy oil in China’s currency. While this trend won’t see major growth this year, BCA says the US dollar is still enough to disrupt its role as the world’s reserve currency, and a weaker US dollar is less of a headwind for gold prices. The BCA also noted that as central banks continue to diversify their assets in 2023, the global de-dollarization trend is expected to support gold.
