(Kitco News) - While gold is seeing some modest selling pressure on Monday, prices are holding initial support above $3,200 an ounce. One market analyst is not ruling out higher prices through the rest of the year as uncertainty is expected to remain elevated.
Both equities and bonds have started to stabilize after significant volatility last week. However, in an interview with Kitco News, Sameer Samana, head of global equities and real assets at Wells Fargo, said global financial markets and economic growth continue to face heightened risks due to the ongoing trade war.
Samana added that in this environment, gold should continue to do well as an important diversification tool. Last week, Wells Fargo raised its end-of-year gold price target to $3,200 an ounce, up from the initial estimate of $3,000.
Tariff fears have eased slightly after President Donald Trump announced a 90-day pause on his extensive global reciprocal tariffs. However, the government will maintain a broad 10% levy on all imports.
“It is still a 10% tax hike, so someone does have to pay for it—companies or consumers,” he said.
At the same time, investors are trying to navigate the complicated trade war with China after the U.S. imposed 145% tariffs on imported goods and Beijing increased its own tariffs on U.S. imports to 125% on Friday. During the weekend, the U.S. government exempted electronic devices from Chinese duties.
Not only do consumers face increased costs, which could weigh on consumption, but Samana noted that companies are unable to make any long-term plans or budgets. He noted that many companies have already stopped providing earnings guidance due to tariff uncertainty.
Samana added that in this environment, he is not surprised that both bonds and equities are struggling. He noted that, faced with high debt levels and slower growth, gold and broad commodity positions should continue to do well.
“Almost every time when both stocks and bonds either fall or really struggle to gain traction, commodities as a whole tend to outperform. That doesn't mean that they're always going up, but they tend to do pretty well in this environment,” he said. “This is the benefit of a well-diversified portfolio.”
Although economic risks are elevated, Samana said that Wells Fargo’s base case is that the U.S. avoids a recession. He added that while the bank’s multi-asset portfolio is overweight commodities, it still only comprises about 15% of holdings.
“We don't want to get too defensive because policy can change very quickly,” he said. “In commodities, we definitely like gold, but we also like energy. Below $65 is about breakeven for U.S. [oil] production, so we could see a pullback in production. Maybe with oil, you don’t go there to hide but more to diversify.”
At the same time, Samana said that taking bigger positions in cash and short-term bonds could be a good strategy.
“Using the Fed funds as a proxy for cash should make sure that you have enough of an emergency fund on hand so that when we have these bouts of volatility in the next six to 12 months, you're kind of immune or at least buffered from the price action,” he said.
Looking at commodity exposure, Samana said that a baseline strategic allocation should be between 2% and 5%, but in the current environment, it makes sense to have a tactical allocation between 4% and 7%.
He recommends holding a third of that commodity portfolio in gold, a third in energy, and the last third split between base metals and soft commodities.
“Strategic allocation to commodities is anywhere from 2% to 5%. We are tactically overweight, so the tactical allocation is anywhere from 4% all the way up to 7%, so 2% to 5% strategic and 4% to 7% tactical,” he said. “Then look at that kind of benchmark allocation to precious metals. I could make the case for a third of the portfolio being in precious metals right now.”
“The two words that keep coming to mind when people ask what our strategy is right now are quality and resilience,” Samana said. “I think gold fits both of those descriptions.”
