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Gold stuck at $2,000, caught between high inflation and recession fears - Quant Insight

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(Kitco News) - The gold market continues to keep its head above water as prices trade on either side of $2,000 an ounce, with one analyst saying that in a market with conflicting influences, the consolidation represents fair value for the precious metal.

In an interview with Kitco News, Huw Roberts, head of analytics at Quant Insight, said that their modeling suggests that traders should sit on the sidelines in the gold market and wait to see how the tug-of-war between economic activity and central banks' fight against inflation plays out.

He said their modeling suggests that gold's fair value is around $1,990 an ounce.

"Sometimes the best trade you can make is no trade at all," he said. "We had a nice bounce over March, but we have been consolidating for the last three weeks, and we don't have an edge either way right now."

Roberts said that the growing risks of a recession and the ongoing banking crisis creating tighter credit conditions are providing solid support for gold and precious metals. However, on the other side, stubborn inflation that is starting to embed itself in the economy is forcing central banks, led by the Federal Reserve, to maintain their aggressive rate hikes, keeping real yields elevated.

Roberts said that QI modeling suggests these two drivers are fairly evenly balanced. He added that right now, investors have to wait to see if central banks are able to get inflation under control before they break the economy.

Cracks in the economy continue to grow, with First Republic Bank the latest major U.S. financial institution to collapse; however, Roberts said that the U.S. labor market remains fairly healthy.

He also noted that while regional banks continue to struggle in a rising interest rate environment, the risks of a systemic collapse of global financial markets have diminished in recent weeks.

Although QI doesn't provide predictive modeling and only monitors current market conditions, Roberts said that he personally expects the global economy to fall into a recession. However, he also noted that this is the most anticipated recession in recent history.

"I suspect it's just the fact that we've never had an economic cycle quite like this, the pandemic and lockdown, followed immediately by armed conflict in Europe," he said. "As a result, the normal leads and lags are even more disrupted than you would normally see."

World Bank sees gold prices outperforming broader commodity sector as economic growth weighs on demand

At the same time, it's not just gold that is suffering from a lack of direction. Roberts noted that most commodities are caught in the push and pull surrounding the broader economy.

Looking at silver, QI's modeling suggests a fair value of around $23.90 an ounce. Roberts noted that the prices are about half a standard deviation from the models. "For us, that is just model noise."

In comparison, Roberts noted that in mid-February silver prices were 16% below fair value and they were expecting to see March's rally.

Roberts said that compared to gold, silver's fundamentals are being driven by a tug-of-war between global growth and a potential recession. He noted that QI models show silver is acting more as an industrial metal than a monetary metal.

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.