Gold will continue to shine as Russia's war with Ukraine changes the geopolitical, financial market landscapes
In a telephone interview with Kitco News, Chantelle Schieven, head of research at Murenbeeld & Co., said that gold has found a new range and that the precious metal is building a solid base between $1,900 an ounce and $2,000 an ounce.
The gold market has benefited from significant safe-haven demand as Russia's invasion of Ukraine enters its fifth week. Even if the war in Eastern Europe is resolved, Schieven said she doesn't expect safe-haven demand to dry up completely. She added that the conflict has become a critical pivot point that is changing the global geopolitical landscape and financial markets.
"The overall fear in the market is not going away anytime soon and that will continue to support gold," she said. "Gold has established solid support around $1,900 and a strong trend is emerging even if geopolitical tensions start to ease."
Schieven said that the war has caused nations to draw new lines between allies and opponents. She added that globalization trends are being disrupted as countries look to develop their own supply chains, which have broken down because of sanctions western nations have put on Russia.
She also noted that Western governments are increasing their military spending, which will drive deficits higher.
In the current environment, Schieven said that nations friendly to Russia like China could continue to diversify away from the U.S. dollar, which means gold will become an essential tool for central banks.
"When countries don't trust each other and don't trust each other's currencies, gold becomes a strategic asset. It will add credibility to a country's currency," she said.
Along with rising geopolitical tensions, Schieven said that fading globalization trends will also add to rising inflation as developing domestic supply chains will be more expensive for companies.
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Schieven added that rising consumer prices will keep real interest rates in negative territory, which will provide another crucial supportive element for the precious metal.
Fed has no plans to get in front of inflation
Although inflation is expected to remain elevated through 2022, Schieven said that she doesn't expect central banks, specifically the Federal Reserve, to make any aggressive moves to get it under control. She added that Federal Reserve Chair Jerome Powell has talked about aggressively tightening monetary policy; however, following up that talk with action will be difficult.
"The Fed is stuck because of debt levels. Higher rates would kill the economy," she said. "The Fed needs inflation because it is the only way the government will be able to deal with its debt."
In a keynote address at the National Association for Business Economics Annual Economic Policy Conference Tuesday, Powell set the stage for the central bank to raise interest rates by 50 basis points in May.
Along with Powell's comments, last week, the central bank signaled that it could raise interest rates seven times this year and start reducing its balance sheet in May.
Schieven said that while seven interest rates sound like a lot, investors need to look at the bigger picture. She explained that if the central bank achieved its goal, interest rates would still be below 2% by the end of the year.
However, looking beyond 2022, Schieven said that the Federal Reserve will be unable to follow through with more rate hikes.
"I think the economy could withstand interest rates around 2%. It wouldn't push the economy into a recession," she said. "But I doubt they will be able to do any more rate hikes next year. I think interest rates will stay at 2%."
Looking at gold prices for 2023, Schieven said once it becomes clear that the Fed is stuck at a lower neutral rate, gold will again take off with prices pushing above $2,100. She added that long-term Murenbeeld & Co. see gold prices surpassing inflation-adjusted all-time highs around $3,000 an ounce.