The gold market has been rational for the past three years, according to investment bank Liberum. So it makes it easy for investors to analyze it. In addition, Liberum predicts that industrial metals, including silver, will outperform gold.
What gold and other commodities react to!
cryptocoin.comAs you follow, gold has experienced significant turmoil over the past three years, trading below $1,500 and rising to new record highs above $2,050. However, Liberum analyst Tom Price says that despite the volatility, it is relatively easy to explain the price direction of gold. In this context, Price makes the following statement:
After the lockdown in 2020, what gold and other commodities reacted to was the pumping of capital into economies. It has been a trade-off for weak growth. We’re starting to see an inflation problem arise. One of the reasons was that economies competed with each other to restock all goods at once.
This was a very aggressive and simultaneous pressure on industrial goods by countries. “And gold was dragged into this situation because people who invested in gold realized the inflation shock was coming,” Price explains. However, all commodity markets calmed down as the market realized that the Fed was getting serious about the Fed’s rate hike cycle approaching 2022. “It kicked speculators out of the commodities space because they could generate returns on other assets,” Price said. Gold is down 15% from the Ukraine war peak in March,” he says.
“This is what raised the price of gold to the new year”
And the only thing pushing speculators back into the gold market was the slowdown in the Fed’s rate hike cycle in the fourth quarter. “As the rate hike cycle slowed down, bullish factors started to emerge. China’s quarantine was loosening and Russia’s war was still going on. So that anxiety trade was there,” he comments. Based on this, Price shares the following detail:
At the beginning of this year, these two bullish factors were the main drivers of gold. At the same time, the Fed faded into the background. So these two bull factors suppressed the bear factor. That’s what drove the gold price up into the new year.
“The gold market is rational right now!”
This did not last long, however, and the Fed returned as the dominant driver of the gold price. This view was solidified after Fed Chairman Jerome Powell warned of the possibility of higher and faster rate hikes amid strong economic data and disturbingly high inflation. “Everyone now accepts the fact that the US economy is doing very well and the Fed is chasing inflation. To me, it all makes sense,” he says. Price points out that it becomes easier to analyze the market as gold responds very well to these three factors. In this context, he makes the following statement:
Actually, I can rationalize the price performance of gold in terms of the three dominant drivers of the price, the Fed, China and the Ukraine war. And I can see their price performance reflecting the dominant drivers over the last 12 months. And that’s pretty rare to say about any commodity market. The gold market is rational right now.
Yellow metal will struggle as Fed remains aggressive
According to the CME FedWatch Tool, investors are already pricing in 77% of a 50bps increase as markets prepare for the March Fed meeting in less than two weeks. But there is one unknown that needs to be watched closely: what Powell said and how the markets reacted. Price said, “I was fascinated that Powell said something – ‘you’re officially a hawk’ – but the markets came up with their own interpretation. There is a real conflict between the views of the Fed and the markets,” he comments.
According to Price, this means there is a large amount of capital waiting to be returned to the market on the sidelines. Therefore, Price said, “It has been steadily withdrawing throughout 2022. And now people want to go back to these markets and make a profit. But the Fed won’t allow them for a while, anyway,” he says. A low-yielding asset like gold will struggle as the Fed remains more aggressive than expected. “This is the kind of pressure that gold is currently under, and that explains the sales over the last few weeks,” Price clarifies.
Liberum’s price predictions for 2023
Liberum predicts the US economy will start to slow in the second quarter but avoid a recession this year. The gold outlook, described by Price, is bearish as the Fed keeps interest rates higher for longer and the US economy sees sluggish growth. Liberum’s average gold price for this year is $1,690. Quarterly averages are $1,795 for Q1, $1,710 for Q2, $1,630 for Q3 and $1,630 for Q4. In 2024, the bank predicts that gold will stabilize above $1,600.
Price expects the Fed to keep interest rates significantly positive over the next 12 to 24 months and a positive growth outlook for the economy. According to Ten, people will begin to shift their investments into other commodities, particularly industrial metals. Price in this context. “I’m definitely a bear on gold for the next two to three years,” he says.
Silver and industrial metals will outperform gold
In light of this outlook, Liberum predicts industrial metals, including silver, will outperform gold. One reason is the material-intensive infrastructure program of US President Joe Biden. Price explains my views on this matter as follows:
We are more constructive about industrial metals versus gold. The US begins implementing a material-intensive infrastructure program. The Biden-approved program, which he presented to Congress in 2020 and was approved in 2021, is now getting to the stage where they need to start assembling the raw materials.
A program of this size would require the US to import goods due to insufficient production capacity or surplus. “I encourage investors who probably have some money in gold to turn some of that money into commodities like copper, aluminum, nickel and zinc… If our constructive view of the US economy works, I can definitely see silver outperform gold,” Price adds.
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