The world is in the midst of a 'significant macroeconomic reset' and gold is the 'shining star' - Bloomberg Intelligence
(Kitco News) With the Federal Reserve and other major central banks still raising rates into a looming global recession, Bloomberg Intelligence is projecting "a severe global economic reset," with gold set to be one of the top commodity assets this year.
"We see gold as the potential shining star this year," said Bloomberg Intelligence senior macro strategist Mike McGlone. "The Federal funds rate … [is] still rising [and] may represent the early days of what we see as a severe global economic reset. The enduring gold bull and crude-oil bear markets may be energizing."
Despite the Fed remaining hawkish at the start of the year, McGlone forecasts a transition to rate cuts as economic growth slows. "Our base case has the world in the midst of a significant macroeconomic reset," he said in his February commodities outlook. "The Federal Reserve will be transitioning to easing soon to address diminishing economic growth and inflation."
The extreme fiscal and monetary stimulus during the pandemic, followed by Russia's invasion of Ukraine, and then unprecedented synchronized aggressive tightening by central banks all have significant consequences for commodities.
"Never before has U.S. year-over-year money supply spiked to the extreme of 2021 and to minus now in our database since 1960. An organic recovery in global demand pull forces and from China appears unlikely vs. the risks of normal reversion toward a lower plateau for commodity prices," McGlone noted.
But gold is the exception to this. And McGlone prefers to look at the relationship between gold and oil to get a more precise outlook. "Crude oil's high-velocity rally to the peak in 2022 may have solidified a foundation for gold. The metal appears to be bottoming from the steepest 24-month drawdown since 2015," McGlone said. "The 2022 price spike may have set the new standard, with implications for commodity deflation and gold buoyancy."
Since 2007, gold has gained about 130%, while WTI saw a decline of about 20%. And if WTI crude falls to $40, it would pave the way for gold to hit $3,000 an ounce.
Right now, gold is "on the cusp" of taking out the $2,000 an ounce level and hitting a new record high. This will happen once the market "sniffs out an inevitable Fed pivot."
Bloomberg Intelligence does not see China's economy reopening as a saving grace for oil this year. "In a scenario that China reopening demand is swift and strong and the world has a soft landing, commodities may remain buoyant with Treasury bond yields and risk assets," McGlone described. "Our base case for a global recession worthy of the unprecedented liquidity rug-pull from central bank tightening, war in Europe and 2022 spike in commodity prices may be more likely to buoy gold and pressure copper, crude oil and the stock market in 2023."
The inevitable Fed pivot will push gold prices above their $1,700-$2,000 trading range that has dominated since 2019, McGlone added.