(Kitco News) - Although gold continues to struggle below $4,100 an ounce as investors brace for the possibility of higher interest rates, one market strategist says the precious metal has reached a point where the downside risks are becoming increasingly limited while the long-term upside remains compelling.
In an interview with Kitco News, Sameer Samana, Head of Global Equities and Real Assets Strategy at Wells Fargo, said that after gold's more than 20% correction from its January record high, investors should shift their focus away from short-term volatility and instead evaluate the metal's longer-term risk-reward profile.
He added that regardless of whether oil prices remain elevated or the Federal Reserve ultimately delivers additional rate hikes, much of that risk has already been reflected in gold prices.
"I think the risk-reward has flipped quite a bit since the peak," he said. "If the Fed funds futures market is embedding two to three hikes, then I think the price of gold is embedding two to three hikes."
He said investors now need to ask a different question.
"What are the odds of something greater than two to three hikes? Inflation isn't that much of a problem where you would need significantly more tightening."
Gold has struggled for months as renewed Middle East tensions have pushed oil prices higher, which in turn have fueled expectations that the Federal Reserve may be forced to tighten monetary policy. Rising real yields have increased the opportunity cost of holding non-yielding assets like gold.
However, Samana argued that markets have likely become overly pessimistic.
"The real question is whether the risk-reward is favorable for an exposure in your portfolio that's very hard to replicate elsewhere. I think so,” he said.
Downside risk remains, but long-term trend is intact
Samana acknowledged that the technical picture has yet to improve and warned investors against assuming the correction has fully run its course.
“It’s hard to argue that gold has bottomed," he said. "In the near term, I think you probably have risk to the downside to $3,500,"
At the same time, he also noted that technical resistance is also likely to emerge between $4,500 and $4,900 as investors who bought near the highs look to exit losing positions.
Despite those risks, Samana emphasized that investors should not lose sight of the bigger macroeconomic cycle.
"When the dust settles, you'll be back to much of the same," he said. "Higher oil prices and higher interest rates are going to slow the economy, which will then cause central banks and fiscal authorities to come back in and do what they always do."
That eventual slowdown, he said, would likely lead policymakers to cut interest rates again and potentially provide additional monetary support.
"Could you see $3,500 before $4,500? It's possible," he said. "But unless you believe that longer-term cycle is over, then it really is just a matter of time before gold prices are higher."
Gold remains valuable portfolio insurance
Samana noted that gold has historically held up relatively well during economic downturns.
Looking at recent recessions and periods of aggressive monetary tightening, he pointed out that gold's declines have generally been modest compared with many other asset classes. Even during the 2020 recession and the Fed's tightening cycle in 2018, gold experienced drawdowns of roughly 15%, while the 2008 financial crisis produced a decline closer to 34%. More importantly, prolonged bear markets in gold typically unfold over several years rather than in sharp collapses.
Because gold has already corrected nearly 30% from its peak, Samana believes much of the potential damage has already been absorbed.
"I think a lot of the pain has already been discounted in the price," he said.
He added that gold continues to provide valuable diversification because it often performs well when traditional assets struggle.
"This is an asset that does not work in every environment," he said. "But when stocks don't work and bonds don't work, there's a really good chance that gold is working."
Wells Fargo maintains bullish long-term outlook
Samana's comments are consistent with the latest researchWells Fargo Investment Institute, which argues that the recent correction has not changed its longer-term bullish outlook.
In its latest "Chart of the Week," the firm said gold's decline has been driven primarily by profit-taking and rising expectations for Fed tightening as higher real yields temporarily reduced gold's relative appeal. However, the institute expects that relationship to stabilize if energy and supply-chain pressures begin to ease.
The report also notes that the structural drivers supporting gold remain firmly in place, including continued central bank purchases, reserve diversification and persistent geopolitical uncertainty.
Wells Fargo reiterated its long-term forecast for gold to reach $5,300 to $5,500 an ounce by the end of 2026, with prices climbing to $5,800 to $6,000 an ounce by the end of 2027.
For Samana, those longer-term targets illustrate why investors should look beyond the current correction.
"If you can look out 18 months to the end of 2027, I still think probably at least a reclaiming of the highs, with the possibility of new highs, is very real," he said.
"So you give me $500 of downside and roughly $1,500 to the upside. As an investor building portfolio exposure, I think that's a very attractive risk-reward proposition."
