It’s A Matter Of Time For Gold Prices To See These Levels

There are unique developments for gold prices. The US Federal Reserve is likely to maintain its hawkish stance. Also, the gold market is on the verge of a perfect storm as it drags the economy into a potential recession. Tavi Costa, market strategist and portfolio manager at Crescat Capital, assesses this situation. Let’s look at the details.

Unique position for gold

According to Costa, gold has a unique position compared to stocks and bonds. This makes it an ideal choice for portfolio diversification. Costa predicts gold prices will soon exceed $2,000 an ounce. On the other hand, Costa attributes this rise to the rising interest rates of the world. He also attributes it to his grappling with the increasing inflation pressures and the debt-ridden global economy.

Costa identifies three risks that will support gold prices in the global economy. It is unlikely that the US government will be unable to pay its debt. However, Costa warns that this cannot be completely ignored. On the other hand, there are situations that he considers as a threat. One of them is a recession triggered by the Fed’s tightening. It’s also the rise in US debt levels that led to a sell-off in the bond market. To him, these are real and impending threats.

recession fears

Costa is sounding the alarm about an impending recession during 2023. Costa’s research reveals that not only is the yield curve at its most inverted in recent history, but an astonishing 90% of the curve is inverted. This means that short-term returns are currently higher than long-term rates everywhere. “When history shows 70% of the entire yield curve inverted, it’s time to stop everything, invest in gold and sell the S&P 500,” Costa said. says.

Costa’s recession outlook coincides with the US Treasury starting new bond auctions after the debt ceiling crisis was resolved in Congress. According to analysts, the US government will need to issue $1 trillion in debt to replenish its depleted funds. But Costa’s research reveals that the number of foreign buyers of US debt has fallen to its lowest level in 19 years. Costa comments at this point:

“I am not claiming that this is the end of the United States or the beginning of an interest rate hike that will wreak havoc. I attribute a very low probability to this scenario. The more likely outcome is that as rates continue to rise, the Fed will eventually have to be a last resort buyer, given the three risks I mentioned earlier and oversupply. In a situation like this, it’s hard to believe that tangible assets, especially gold, would trade at just $2,000 per ounce.”

Strong demand from central banks

Despite the reluctance of investors to the precious metals market, Costa emphasizes that gold continues to benefit from strong demand from central banks. Costa argues that central banks’ gold purchases are fundamentally reshaping the precious metals market.

“The tendency of central banks to buy gold underlines the strategic importance of neutral assets in the ongoing globalization chess. As interest rates rise around the world, volatility in currency markets will increase. In such an environment, central banks will increase their precious metal assets. They will also gradually build up their reserves.”

Costa notes in his research that historically, gold represented about 40% of all global reserves. But in the early 1980s, gold made up more than 70% of foreign reserves. Costa also talks about central banks’ gold holdings returning to historical averages. He stressed that in this case, they would need to purchase $3.2 trillion worth of precious metals.

Safe harbor asset gold

Costa pointed out that while gold is an attractive safe-haven asset, it is significantly undervalued compared to the rest of the market. The precious metal’s value remains close to historic lows compared to the S&P 500, despite gold prices falling 6% from record highs of over $2,000 an ounce.

“Gold is also ridiculously cheap relative to the money supply. To claim that gold is expensive, it is necessary to claim that the debt problem has improved, not worsened. But I do not have such a belief.”

Considering the current environment, Costa suggested holding about 30% in equities as the market was significantly overvalued. It also recommended allocating about 20% to fixed income, 30% to gold, and 20% to a diversified basket of commodities.

US dollar may be on the verge of losing its reserve currency status

According to Goehring & Rozencwajg, emerging central banks are preparing for a new monetary regime in which gold will play a vital role as a settlement mechanism. “The US dollar may be on the verge of losing its reserve currency status,” said Leigh Goehring, managing partner of Goehring & Rozencwajg, stressing that such a change would have a unique impact on the market.

Recently, central banks in emerging economies such as China, India, Turkey, Egypt, Qatar and Singapore have strengthened their reserves by increasing their gold allocations. After the record purchase of 1,136 tons the previous year, the purchases continued. In the first quarter of 2023, central banks added 228 tons to their global gold reserves.

Meaning of gold purchases

According to Goehring, this aggressive gold purchase supported gold prices above the $1,900 per ounce level despite a hawkish Federal Reserve. “We will surpass the triple peak of $2,000 an ounce,” Goehring said. Central bank purchases will provide significant momentum.” says. Over the past two years, central banks have not only represented an important source of demand. It has also been the driving force of the current decade.

Goehring & Rozencwajg draws parallels with stimulating commodity price increases in 1930, 1968 and 1998. Accordingly, it foresees a potential monetary regime change. He believes the upcoming monetary regime change will have a similar effect on commodity prices. Speculation that the US dollar has lost its reserve currency status has been going on for years. On the other hand, Goehring argues that there is increasing evidence that countries are moving away from the dollar.

He proves

Saudi Arabia discusses oil transactions in yuan, sanctioned Russia pays for oil sales in yuan, Brazil expresses its willingness to do agricultural trade with China in yuan, and French TotalEnergies is open to selling LNG to China and accepting yuan are among these examples.

However, Goehring notes that these efforts cannot be classified as complete monetary regime change. Because he emphasizes that China has a closed capital account. He emphasizes that this makes free Yuan exchange impossible. This is where the importance of gold comes into play. Goehring explains that any move by China to replace the US dollar as its reserve currency will require convertibility to gold. In this case, foreign currency holders will be able to convert some of their Yuan trade surplus into gold through the Shanghai Gold Exchange.

Possible scenario

This potential scenario could explain the increased gold purchases by central banks. China, for example, has recently shown a significant commitment to expanding its gold reserves. He bought gold for the seventh month in a row in May. Since November, China has bought 144 tons of gold. Accordingly, it increased the total stocks of the central bank to approximately 2,092 tons. Goehring thinks at this point:

“Are we working towards a system that allows trading in commodities outside of the dollar? If we encounter a capital imbalance such as a yuan surplus or shortage, can we solve it using gold? Is this our discovery to weaken the dollar’s reserve status, trade in local currencies, and ultimately correct capital imbalances through gold? This is a thought-provoking idea.”

Goehring & Rozencwajg remains bullish for gold for the remainder of this year. It also predicts a breakthrough towards $2,100 per ounce.

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