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Is gold on the cusp of a new bull market?

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(Kitco News) - There is no arguing that 2022 has been a challenging year for gold. The precious metal has not reacted to persistent geopolitical uncertainty, rising inflation and growing global economic turmoil.

Despite all the economic malaise, the gold market has fallen for the last six months straight. Gold's disappointing price action has brought the bearish investors out in full force as negative sentiment has pushed its highest level in four years.

The negative sentiment can be seen in recent headlines in the precious metal market. This week commodity analysts at ING noted that gold is in a technical bear market from its peak in March. At the same time, analysts at BMO Capital markets downgraded their gold and silver prices for 2023 by 6% and 11%, respectively.

However, before you give up on gold and silver, it is important to note that this negative sentiment has never proven to be sustainable. The last time the gold market saw six months of decline was from April to September 2018. After September, the precious metal when on to build a strong uptrend that culminated with prices pushing to a new record high above $2,000 an ounce.

The same pattern is also forming in gold's bearish speculative positioning, which is at its highest level since December 2018. We are not saying that gold prices are heading back to $2,000 any time soon, but at some point, investors will start to recognize the value opportunity building within the precious metal space.

If you are looking for the spark that will ignite the next bull run in gold, you don't have to look much further than the Federal Reserve. The U.S. central bank's aggressive monetary policy has driven real bond yields, which were around -1% at the start of the year, to around 1%. This, in turn, has pushed the U.S. dollar to its highest level in two decades. These are two mighty headwinds for gold.

However, the Federal Reserve's monetary policy is starting to put stress on the global economy. Market analysts have noted that the extreme dollar strength is creating a significant imbalance in the global currency market. In the last seven days, both the Bank of Japan and the Bank of England have had to intervene in their respective markets.

Currency markets volatility is a sign the Fed has already broken the global economy - MKS' Shiels

Market volatility will only get worse as the Federal Reserve stands relatively alone as the only major central bank that is tightening its monetary policy. Yes, the U.S. central bank has an obligation to support the U.S. economy, but can it continue to raise interest rates in a vacuum?

In a recent interview with Kitco News, Robert Minter, director of ETF Investment Strategy at abrdn, warned investors that the Federal Reserve has already made its policy mistake and the global economy is just waiting for the fallout.

"A lot of people are on the sidelines waiting for something to break, and when they see that it has, they will turn to gold," he said.

Minter is not alone; Ronald-Peter Stoeferle, Managing Director at Incrementum AG, said that the U.S. dollar strength will lead to a deep and severe recession.

Gold still faces some difficult headwinds, but in this environment, there is a growing contrarian view that holding some gold as a safe haven makes some sense.

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.