(Kitco News) - While the gold market remains off its highs from the first quarter, it is still on track to end the year above $2,000 an ounce and push close to $5,000 an ounce by the end of the decade, according to the latest In Gold We Trust Report.
In its annual gold outlook, analysts at Incrementum AG remain bullish on gold as rising inflation threatens to push the global economy into a recession and create a stagflationary environment. The European investment firm issued a warning, saying that normalizing monetary policies worldwide is started to expose major issues in the global economy that were papered over by loose monetary policies and massive amounts of liquidity.
"Just as in 2018, when we warned of the inevitable consequences of the attempted turning of the monetary tides, we are now issuing another explicit warning. In addition to wolfish inflation, a bearish recession now looms," the analysts said in the report.
Incrementum pointed out that of the Federal Reserve's last 20 tightening cycles, only three have not ended in a recession.
"The Federal Reserve runs the risk of overestimating the impact of rate hikes and balance sheet reductions on containing inflation, just as it has underestimated the impact of rate cuts on boosting inflation," the report said.
With the threat of stagflation looming large, the analysts noted that most investors are inadequately positioned to protect their capital as the traditional 60/40 portfolio structure is expected to see negative returns for only the fifth time in 90 years.
With inflation expected to hold above 5% through 2022, Incrementum said that equity markets could see further losses this year. The analysts said that holding precious metals has proven to provide a cushion for those losses. So far this year, the S&P 500 has lost 18%, dropping below 4,000 points; however, gold prices are up 1% on the year as prices push back above critical resistance at $1,850 an ounce.
"The historical performance of gold, silver and commodities in past periods of stagflation argue for a correspondingly higher weighting of these assets than under normal circumstances," the analysts said. "But also, the relative valuation of technology companies to commodity producers is an argument for a countercyclical investment in the latter."
Incrementum's bullish outlook for gold comes as prices have struggled during the second quarter as markets focused on the Federal Reserve's plans to aggressively raise interest rates. Markets are forecasting the U.S. central bank to increase interest rates to 3% by the end of the year.
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| The S&P 500 is headed lower, which is good for gold |
Although interest rates will continue to head higher, the analysts said they don't expect the trend to be sustainable as the global economy slows and market liquidity dries up.
"As soon as the Federal Reserve is forced to deviate from its planned course, we expect the gold rally to continue and new all-time highs to be reached. We believe it is illusory that the Federal Reserve can deprive the market of the proverbial "punchbowl" for any length of time, and we seriously doubt that the transformation of doves into hawks will last," the analysts said. "If the downward trend on the stock and bond markets that has persisted since the beginning of the year continues, a brash counter-reaction by the Federal Reserve seems to be only a matter of time."
While gold will continue to do well as an important risk and inflation hedge in the near term. The analysts also see long-term potential as Russia's war in Ukraine has drawn new geopolitical lines around the world.
The analysts noted that harsh sanctions from the U.S. and its Western allies had weaponized the U.S. dollar against Russia, causing some nations to reevaluate the greenback's role as the world's reserve currency.
"We think it is plausible that gold, as a neutral monetary reserve, will emerge as one of the beneficiaries of the troubling conflict between East and West," the analysts said. "Gold will probably gain further acceptance as a reserve currency in many countries and increasingly establish itself as an anchor of confidence and purchasing power."
