(Kitco News) - The gold market continues to hold support above $5,000 an ounce but is struggling to attract any sustainable bullish momentum, especially as the U.S. dollar attracts some safe-haven flows; however, one economist warns investors not to confuse short-term trading momentum with long-term investing.
In an interview with Kitco News, Thorsten Polleit, Honorary Professor of Economics at the University of Bayreuth and publisher of the BOOM & BUST REPORT, said that the U.S. dollar and Treasuries are benefiting from a broader liquidity trade as investors try to protect themselves from economic and geopolitical uncertainty.
He explained that the U.S.-Israel joint military action against Iran is putting significant stress on the global economy and he expects that this will force central banks, led by the Federal Reserve, to compress risk to backstop the economy.
“Investors are pretty confident that the central bank will open up the floodgates to bail out struggling banks, or hedge funds and whatever else there might be, which could cause any potential trouble to the financial system,” he said.
Polleit noted that in periods of market stress, investors often rush into the most liquid assets available, which currently benefits the U.S. dollar rather than precious metals. That shift in liquidity can temporarily pressure gold and silver prices even as underlying economic risks increase.
“In crisis situations people rush into cash even at the expense of gold and silver in the short term,” he said.
However, Polleit emphasized that this liquidity dynamic should not be mistaken for weakening long-term demand for precious metals. He pointed out that structural investment demand for gold and silver continues to build as investors look for protection against rising government debt and persistent inflation risks.
“There is now structural demand for gold and silver,” he said.
Polleit added that even though investors may temporarily favor cash during periods of uncertainty, the broader macroeconomic environment remains supportive for precious metals.
He said that rising government debt, geopolitical conflict, and continued monetary intervention from central banks will continue to weaken the purchasing power of fiat currencies over time.
“This is an inflationary regime,” he said. “With more government debt, higher energy prices and geopolitical conflicts, there is pressure on the purchasing power of all fiat currencies.”
He also warned that central banks have limited room to significantly raise interest rates because of the massive debt burdens facing governments and corporations. Higher rates would quickly destabilize the financial system, forcing policymakers to return to monetary stimulus.
“The economy is highly indebted,” he said. “If interest rates move much higher, the central bank will step in and support bond markets.”
Because of these structural pressures, Polleit believes the long-term bull market in precious metals remains intact even if prices experience periods of volatility.
He said that gold and silver appear to have undergone a fundamental revaluation over the past several years as investors increasingly recognize the risks embedded in the global financial system.
“Gold and silver have entered uncharted territory,” he said. “But that doesn’t mean they are in a bubble. It means they have been revalued relative to other asset classes.”
Looking ahead, Polleit expects the metals to continue trending higher as governments rely on deficit spending and monetary expansion to manage economic shocks.
“I wouldn’t be surprised if gold is trading around $8,000 within the next five years,” he said. “That would simply reflect the risks building in the global economy.”
Despite his bullish outlook, Polleit cautioned investors to approach precious metals with a long-term perspective rather than trying to trade short-term volatility.
“If you already hold gold, keep it,” he said. “And if you are considering buying gold or silver, you can still do so at these levels if you have an investment horizon of at least two or three years.”
