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(Kitco News) - Gold's initial rally to $2,000 an ounce after last month's banking crisis was a textbook reason why investors need to own some gold in their portfolio, and according to one investment firm, the precious metal will remain a valuable safe-haven asset through the rest of 2023.
In their latest report published last week, Imaru Casanova, deputy portfolio manager and Joe Foster, portfolio manager and strategist for VanEck's Gold Fund, said they still see plenty of value for gold even as prices hold solid support above $2,000 an ounce.
"Last month's developments should act as a wakeup call to those lacking exposure to the gold sector. And the entry point isn't terrible, either. Think about it: despite the heightened level of risk in March, gold didn't even hit its all-time highs," the analysts said. "We don't believe the market is fully reflecting the risks ahead."
The bullish comments come as gold prices recover from a sharp selloff late last week as investors took profits as the market rallied to a 13-month high above $2,050 an ounce. June gold futures last traded at $2,018.50 an ounce, up 0.5% on the day.
Although tensions surrounding the global banking crisis have eased in recent weeks – leading to gold's short-term correction – the fund managers said that these risks remain heightened in an environment of persistently elevated inflation and slowing economic activity.
They warned investors that the global economy hasn't felt the full effects of the Federal Reserve's aggressive monetary policy tightening. "There likely continue to be more cracks in the system – something else could break," they said.
Casanova and Foster noted that the Federal Reserve will be forced to pivot quickly on its monetary policy as economic conditions worsen. After significant volatility in the past month, markets are now comfortable with the idea that the Federal Reserve will raise interest rates by 25 basis points next month.
However, markets are also pricing in a possible rate cut late in the second half of the year.
"This is gold positive," the analysts said. "However, we believe the market has yet to price in the negative impact of a policy change in the fight against inflation and the increasing likelihood of a hard landing or recession. Gold's appeal increases under these scenarios. As evidenced by the gold ETF and Comex positioning, investors have yet to come back in full force to benefit from gold's role as an inflation hedge, as a safe haven in periods of economic, financial and geopolitical volatility, and importantly, as a portfolio diversifier."
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As to how much upside potential gold has in the current environment, Casanova and Foster said that retail investors are only just starting to pay attention to gold. March was the first time in 10 months that global gold-backed exchange-traded funds saw net inflows.
At the same time, Casanova and Foster noted that speculative positioning is also fairly low compared to previous rallies to all-time highs.
"March inflows certainly signal improved gold market sentiment, but current holdings are well below historical levels. The last time gold was $1,970 per ounce, in April of 2022, global gold ETF holdings were more than 12% higher than they are today," the analysts said. "As of March 31, 2023, COMEX net long positions stood at approximately 482 tonnes, according to the World Gold Council. This compares with approximately 819 tonnes in April 2022."
