Rising geopolitical uncertainty could create a war-time economy that drives gold to $2,000 - BCA
In a research note published late last month, the Montreal-based research firm said it was increasing its year-end gold price target to $2,000 an ounce as war-time economies start to be established in the West and the risk of 'fiscal dominance' continues to grow.
"The risk of fiscal dominance, when monetary authorities peg rates at low levels, will intensify as government policy driven by environmental and defense imperatives continues to expand in the West," wrote Robert Ryan, chief commodity and energy strategist at BCA and the lead author of the latest report.
Since BCA's comments last month, political relations between the U.S. and China have deteriorated further after the U.S. shot down a suspected Chinese spy balloon two weeks ago.
This weekend, the U.S. stoked fears that the war in Ukraine could continue to escalate as China is considering supplying Russia with "lethal support."
At the same time, China held joint military drills with Russia and South Africa as the war in Ukraine reached the one-year mark.
Ryan noted that the rise in geopolitical uncertainty comes as economic conditions continue to deteriorate. He added that in the current environment, he doesn't see the Federal Reserve raising interest rates beyond 5% this year.
At the same time, BCA expects the ongoing conflict in Ukraine will continue to disrupt commodity prices, keeping inflation elevated. Ryan added that market disruptions, Western nations' commitment to developing green energy infrastructure, and increased defense spending are all factors that will continue to support higher inflation.
The analysts said they see headline inflation hovering between 4% and 5% during the next few years.
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"Commodity prices will remain volatile this year as well, as governments – primarily in the EU – interfere in markets," the analysts said in the report. "If Russia's position in the war deteriorates, Putin and his government may become irrational actors and take more extreme measures. One of these includes a cut-off in global crude and/or oil products supply, resulting in a global oil supply shock. While global uncertainty is high and US real rates are low, investors will flock to gold as a safe-haven investment."
Another positive aspect for gold amid the rising geopolitical tension is the growing impact on the U.S. dollar. BCA said it sees a marginal increase in petro-yuan trading as nations buy oil in China's currency.
While this trend won't see massive growth this year, BCA said it is still enough to disrupt the U.S. dollar's role as the world's reserve currency, and a weaker U.S. dollar is one less headwind for gold prices.
"Our geopolitical strategists do not expect Saudi Arabia to store the bulk of its wealth in currencies other than the dollar, or to break with the US and realign its national strategy with China, but they do accept that the Saudis can hedge against the dollar," the analysts said.
BCA also noted that the global dedollarization trend is expected to support gold as central banks continue diversifying their holdings in 2023.