(Kitco News) - The gold market is struggling as expectations for the start of the Federal Reserve’s easing cycle continue to be pushed back; however, according to one market strategist, the longer the central bank waits, the greater the risk of a policy mistake, which could ultimately be positive for the precious metal.
In an interview with Kitco News, Nitesh Shah, head of commodity and macroeconomic research at WisdomTree, said that although gold prices have struggled since the start of the year, he remains impressed by the relative strength of the market.
He added that he expects investor interest to return to the market as central banks, led by the Federal Reserve, signal eventual rate cuts this year.
“This year, bonds are going to get more expensive as interest rates go down and that is when interest in gold should return,” he said.
Shah said that he sees gold prices hitting $2,210 an ounce by the fourth quarter of this year, reaching a new all-time high.
However, he added that there is a stronger bullish case for gold as the Federal Reserve runs the risk of making a policy mistake.
“I think right now the market is assessing the economic situation probably a little better than the Fed as they focus too much on supply-side inflation issues,” he said. “By pushing on the brake too hard for too long, they threaten the path of the economy.”
Shah added that gold also looks attractive as inflation could become relatively volatile in his medium to long-term outlook. He pointed out that because of China’s failing economy, the nation could end up exporting deflation worldwide.
“Over the last few years, China has made a ton of solar panels and electric cars and they are going to have to dump them somewhere to support their economy,” he said. “We can expect a lot of cheap goods in the global market dumped there by China, which will be deflationary.”
Shah also noted that a recession in the U.S. would also be deflationary. This environment will provide the Federal Reserve enough room to lower interest rates; however, Shah also pointed out that inflation remains a long-term threat as sovereign debt continues to grow and the deglobalization trend picks up momentum.
“Every major economy you look at governments have growing debt, and this isn’t a problem with an easy solution, and that to me is creating long-term inflation,” he said. “This just adds to the risk that central banks will make a policy mistake at some point.”
Silver could outperform gold
Gold isn’t the only precious metal that Shah is paying attention to in 2024. He said that silver has slightly more potential to outperform this year as he sees prices rallying to $26 an ounce.
“Silver has a strong correlation to gold, which explains about 80% of the price, but the remaining 20% is determined by silver’s strong industrial market,” he said. “We expect rate cuts will rejuvenate the industrial cycle and drive silver demand.”
Similar to the gold market, Shah said that silver investors should continue to keep an eye on China as the nation’s silver demand will be a significant driver. Shah said that he expects China’s demand for clean energy will drive further growth in solar panels, which is the biggest pillar of industrial demand for silver.
Shah also noted that industry research shows growing silver demand in the auto sector as both electric and traditional internal combustion cars use more silver in the electronics and wiring
Shah said that while industrial demand for silver continues to grow, the supply has been unable to keep up.
“We can see there is quite a tight market for physical silver, but when comparing the price performance to gold, it is a little disappointing,” he said. “I don’t think this is sustainable, and if the gold ratio continues to hover above 80 points, investors might start recognizing the value of silver.”
Although Shah is slightly more bullish on silver, he said he recognizes this forecast has the most risk.
“I see more potential for silver, but I recognize that silver can underperform gold. If central banks start buying gold like crazy or there is a major credit risk event, investors will flock to gold over silver,” he said.
