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Gold price should be at $2,200 right now, U.S. dollar is overvalued by 20%, says BCA Research

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(Kitco News) Models suggest that gold should be trading at $2,200 an ounce right now, with the U.S. dollar overvalued by around 20%, according to BCA Research.

Gold is one of the best perming assets in 2023 for a reason. The macro outlook and investor demand support higher prices, BCA Research's chief FX strategist Chester Ntonifor told Kitco News.

Gold is up nearly 12% year-to-day, with spot prices last trading at $2,044.10 an ounce.

BCA Research sees gold climbing to the $2,200 level within the next nine to 16 months. This is already where gold should be based on the strategist's models.

Gold's primary driver is the U.S. dollar, which has been weak. And even though Ntonifor sees the global de-dollarization trend as somewhat exaggerated, he views the greenback as overvalued by around 20%.

"The U.S. dollar used to be about 70% of global reserves in early 2000. Right now, it moved down to 60%. Gold's share increased from 6% in 2015 to 10%," Ntonifor said. "The de-dollarization is not something imminent. The IMF data show transactions in U.S. dollars increasing around the world."

However, looking further down the road, the U.S. dollar will be heading lower due to fundamental factors.

"It is the most expensive G10 currency. It is overvalued by 20%, according to our models. You'll be seeing that adjustment. And if the dollar falls, gold catapults higher," Ntonifor said. "If the dollar goes down, gold will rise because gold is an alternative asset."

Central bank gold buying has also offered strong support to higher trading levels, with last year's record-high levels spilling over into this year.

"If you were to model central banks buying gold at current levels, and you look over the next five to ten years, then you would see gold over that timeframe at $2,600," Ntonifor pointed out.

Central bank buying started almost ten years ago, and Ntonifor does not see this trend reversing, with China, India, Russia, and Turkey standing out as major gold buyers recently.

Another key driver for gold this year will be inflation data versus inflation expectations. "There is a disconnect between what's actually happening to inflation and what the market is pricing in terms of where inflation is going to be," Ntonifor noted. "And gold has decoupled from the market-based inflation measures. But inflation is still too high. And we know from history that one of the perfect attributes of gold has been to protect purchasing power. In that sense, if inflation remains sticky, you'll get a breakout in gold."

Another important driver is the commodity sector overall. "Gold does have industrial demand as well. If other industrial commodities are doing okay, then commodity prices tend to move together. If commodity prices rise, that's good for gold," Ntonifor added.

According to BCA Research, the debt ceiling issue will also add volatility into the mix, with the chance of default scenario at around 10%.

U.S. Treasury Secretary Janet Yellen warned on Sunday that if the debt ceiling is not lifted, it could trigger a "constitutional crisis."

"It's Congress's job to do this. If they fail to do it, we will have an economic and financial catastrophe that will be of our own making," Yellen told ABC. "And we should not get to the point where we need to consider whether the president can go on issuing debt. This would be a constitutional crisis."

Negotiations are currently at an impasse after the Republican-led House of Representatives passed a bill in April that would raise the debt ceiling conditional on extensive spending cuts, which U.S. President Joe Biden is against.

The federal government reached the cap on borrowing back in January. Since then, the Treasury has employed "extraordinary measures" to pay the bills.

Last week, Yellen told Congress that the U.S. could run out of money by June 1.

BCA Research believes that the debt ceiling issue would not lead to a dollar collapse but would leave other countries with many questions.

"If nothing is resolved by the June 1 deadline, you'll see depreciation in the dollar. The U.S. never defaulted on its debt. If a country defaults on its debt, the currency will collapse. There is a 10% probability that the U.S. can possibly default this year," Ntonifor estimated.

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.