(Kitco News) Despite a looming recession, commodities are in a supercycle, and gold stands to outperform, according to Wells Fargo. The worst-case scenario for the precious metal is double in price.The commodity supercycle kicked off in March 2020 and has at least six more years to go, John LaForge, the head of real asset strategy for Wells Fargo, told Kitco News.
“Commodities are in a supercycle. We’re structurally undersupplied across the commodity complex,” LaForge said. “The shortest supercycle on record is nine years. We are only in year three. We have at least another six years to go.”
The last bear market was between 2011 and 2020. “The bottom was in 2015 at around $1,000 an ounce,” he said.
This time around, a lot of the price action will depend on how governments handle debt at high interest rates, LaForge noted.
“The commodity supercycle can be very destructive, and it’s probably going to force the hand of a lot of financial players. Supercycles create inflation. And that forces central banks to hike rates at a time when growth is slow, and all these governments have a ton of debt. So, which one wins in the end? You have a clash coming here,” LaForge said.
Signs of an upcoming clash emerged over the weekend with the Silicon Valley Bank (SVB) collapse, Credit Suisse turbulence this week, and contagion risk fears.
The world with inflation at 2% no longer exists, and it will take time for governments and central banks to come to terms with that, LaForge warned.
“The Federal Reserve is going to have to start reconciling the idea of 2% inflation is just not a world we live in anymore, and the supercycle is part of that,” he said. “They’re going to have to start gearing things more towards 3% or 4% inflation, or something might break. Getting authorities, whether central banks or government officials, on board with that takes a while. Along the way, they’re going to make mistakes.”
Gold has been underperforming for the past three years — ever since hitting record highs above $2,000 an ounce in the middle of 2020.
“It’s now undervalued,” LaForge said. “If we look at the main driver of gold outside the supercycle, it is debt levels. Gold is the safe trade in a world where governments will have to figure out how to pay the debt back at a time when interest rates are rising.”
Based on historical analysis of commodity supercycles, gold will at least double, and Wells Fargo is looking at the $3,000 target.
“Your worst case in a supercycle is for gold to double,” LaForge pointed out. “Technically, a supercycle has to be marked with commodity as a group. And that was in March 2020. At the beginning of this new supercycle, gold was at $1,500. So, based on past cycles, you’re probably looking at $3,000 at a minimum.”
Gold could be the big surprise markets are underpricing this year, Wells Fargo’s head of real asset strategy added.
“There is a risk that the Fed does not recognize that they’re breaking something. I’m getting signals in other areas, like office space, where you are getting big defaults. There’s a certain percentage of the economy that is still on variable interest rates, and they just can’t roll this debt over,” LaForge explained. “I don’t think the Fed cares about it at this point. It is so eagle-eye focused on inflation.”
A lot will be determined by what the Fed does during the March 22 meeting, with markets quickly changing their rate hike expectations amidst the banking sector risks. According to the CME FedWatch Tool, markers are now pricing in an 80% chance of a 25-basis-point rate hike next week.
The European Central Bank decided to raise rates by 50 basis points Thursday despite U.S. bank failures and worries about Credit Suisse.
Posted by:
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com