Gold price's 5-year outlook: $1,300 or $4,000? MKS PAMP weighs in
(Kitco News) With the Federal Reserve's tightening cycle on everyone's minds, where will the gold price be five years down the line?
According to the analysis provided by MKS PAMP, there are two options for the precious metal — dropping to $1,300 an ounce or surging to $4,000 an ounce. But it all depends on how fast or slow the Fed tightens.
To project where the gold price could be in 2027, MKS PAMP looked at the yellow metal's response to the past Fed hiking cycles.
"As the markets continue to digest whether a 50/50/50x hiking profile (vs. 50/75/50x over the next few meets) is actually enough to tame inflation, induce a recession etc., it's worthwhile to take a step back and assess just what Gold did during past slow and fast Fed hiking cycles," said MKS PAMP metals strategist Nicky Shiels. "There is a lot of asymmetrical risk depending on whether the Fed hikes quickly (as seen in years 1980/1987/1994) or slowly (years 2016/2004/1999/1977)."
In a slow cycle scenario, defined by incremental hikes, gold could be at $4,000 an ounce in five years.
"A slow Fed hiking cycle is very bullish gold (especially after 1year). Gold hardly falls below levels once the Fed starts on a slow hiking path (the max average drawdown is -2%). On average, 5years on its up 115%, which in today's terms is equivalent to gold over $4,000 in 2027," Shiels wrote. "Slow hiking cycle is one with incremental 25bp hikes, smaller total no. of hikes within the 1st year and/or relatively lower terminal funds rate."
On the other hand, a fast hiking cycle could trigger a steep selloff in gold, with prices tumbling to $1,300 an ounce in five years.
"A fast hiking Fed ensures persistently downward trending gold prices, where five years on, prices are on average 32% lower (i.e.: that's equivalent to gold falling $600 from current levels, through $1,300) … A fast Fed is also bad for stocks (SPX down on average almost 10% 1year after fast hiking cycles)," Shiels noted. "Fast hiking cycle [is] one in which the first hike was >50bp, the 1st year of total hikes exceeded 300bps, there were inter-meeting hikes, and/or higher terminal funds rate."
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For clues as to whether this cycle could be slow or fast, traders can look at market expectations around real rates, she added.
Plus, the Fed's choice between a slow or a fast hiking cycle will depend on the outcome the U.S. central bank wants to achieve, Shiels pointed out. "The Fed will simply need to choose whether to tame inflation (slower hiking cycle) or kill inflation (fast Fed)," she clarified.
In terms of gold's short-term direction, don't expect much of a trend either way as investors are in "wealth preservation mode," and it is too early to make any conclusions as to the Fed's speed, Shiels noted.
At the time of writing, June Comex gold futures were trading at $1,854.70, down 1.49% on the day.
"Gold is now down three weeks in a row, the longest run of losses since December as the bear market in bonds (and equities) continues driving a rally in nominal and real yields," Shiels said. "However, the extent of golds declines … is getting shallower, especially in the face of such large repricing in yields, which is an early sign of being constructive; if this really was a bear market, gold should be well below $1,850, and it isn't."