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Gold price to average $2k in 2022, with potential to hit $2.5k after Q1 price action, says MKS PAMP

Kitco News

(Kitco News) After seeing $200 moves since the start of the year, gold has the potential to hit $2,500 an ounce and average $2,000 an ounce in 2022, according to the updated outlook from MKS PAMP.

The war in Ukraine and sanctions against Russia have dramatically changed the geopolitical situation for the yeat.

"One must make a few assumptions about Ukraine's war. We do not think that it will be fully resolved during 2022 and therefore current precious metals prices will be quite different vs. our original forecasts earlier this year," said MKS PAMP head of metals strategy Nicky Shiels.

The big change to the outlook comes from the increased recession risk, especially in light of the upcoming Federal Reserve's rate hikes and slower economic growth.

"The upcoming Fed rate hikes aimed at countering energy-induced price inflation bring forward recession risk much quicker than the markets previously believed. The view from some Central Banks (especially the ECB) of putting inflation concerns ahead of war concerns is worrying, as is the threat of additional sanctions from the West on Russia or countries (especially China) for implicitly supporting Russia," Shiels wrote.

The U.S. is also facing a risk of double-digit inflation after February's CPI hit 7.9%, which was before the bulk of the commodities' price surge triggered by Russia's invasion of Ukraine, MKS pointed out.

"We originally thought a stagflationary-like backdrop would support Gold. That backdrop is being accelerated with a growing risk of a hyperinflation depression in Russia and a recession for the region / Europe. The structural and ongoing regime change – from globalism to isolationism and the associated inward-looking trade policies – is exacerbated by this war and is inflationary," Shiels said. "There's also a worrying trend in that the global monetary & payments system and wealth have now been politicized and weaponized."

This is why MKS is now looking for gold to average $2,000 an ounce this year, with upside risk of $2,500.

"Considering Q1 price action, our bull case outlined in the original forecasts is now our base case. We now have an average forecast of $2,000/oz for 2022 (vs. $1,800/oz previously), upside risk of $2,500/oz (implying 2022 gains of ~35%, matching yearly 2020 gains at one point), with a downside risk of $1600/oz (vs. $1400 previously)," Shiels noted.

What's this year's 'potential end game'? Gold price at $2,500, oil price at $50 – Bloomberg Intelligence

Supporting drivers for gold is increased demand as investors look for hedges against geopolitical uncertainty, inflation, and recession risks.

"The commodities thesis is also back in vogue with a rotation out of rate-sensitive outperforming sectors (e.g.: big tech) into real assets with the latter's positioning structurally under-owned vs equities & bonds (vs peaks seen in previous bull markets, i.e.: 2010-2012)," Shiels added.

One potential headwind that needs to be closely monitored is Russia's central bank turning to gold-selling to avoid Western sanctions.

"[But] that should be weighed up against the upside risks of non-Western central banks ramping up Gold holdings given the inflationary outcome of this war & the risk of their US$ holdings being sanctioned, at any time, by the West," Shiels explained.

MKS also updated its silver price outlook to $25 from its previous forecast of $22, citing benefits from gold's price appreciation, but noting slightly weaker industrial demand.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.