(Kitco News) – The gold market continues to struggle below $1,900 an ounce; however, long-term, one analyst said that there is still plenty of value in the precious metals space, and it’s only a matter of time before gold and silver go higher as investors underprice the risk of a recession this year.
In an interview with Kitco News, Thorsten Polleit, chief economist at Degussa, said that he expects gold to continue to shine through 2023 as investors look to protect their purchasing power and hedge against growing economic uncertainty.
In his official price forecast, Polleit said that he sees gold prices rising to a peak of $2,200 an ounce with a 2023 average price of $2,000 an ounce. At the same time, he looks for silver prices to peak around $29 an ounce this year with an average price of $26.
Polleit said that he remains significantly bullish on gold as inflation remains a significant threat to consumers and the global economy. While consumer prices have fallen from their highs seen last summer, Polleit said central bank tightening has reduced the global real money supply, liquidity in the global economy.
He added that the falling money supply ultimately has the same impact on consumers as rising consumer prices.
“As the money supply shrink, the price for goods goes up. People still have less purchasing power than they did a year ago, which will be a major drag on growth,” he said.
After unleashing massive amounts of liquidity in 2020 in response to the global COVID-19 pandemic, Polleit noted that central banks worldwide are now trying to put the genie back in the bottle and, in the process, risk creating a new recession.
Since the end of 2019, The Federal Reserve’s M2 money supply increased 40%; at the same time, the European Central Bank’s money supply increased by 25%, said Polleit.
“Central banks have a lot of liquidity the need to take back and it’s going to be painful; it’s going to reduce consumption,” he said.
So far this year, markets have largely dismissed the idea of a recession as the labor market remains healthy; However, Polleit said that one reason why investors aren’t worried about a recession is because they know the Fed’s hawkish stance will only go so far.
“The reality is that markets already don’t have any confidence central banks will normalize monetary policies,” he said. “Markets can no longer function without a safety net provided by central banks. Once trouble in the economy starts, the U.S., we will quickly see the Federal Reserve pull out that safety net.”
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Despite the hawkish comments from some members of the Federal Reserve, Polleit said he doesn’t expect the central bank to get interest rates to 5%. He added that he could see them cutting in the late summer if the market turmoil is bad enough.
Also holding further aggressive action from the Federal Reserve in check is the U.S. government’s growing debt. Polleit noted that in 2021 the government paid about $350 billion to service its debt when interest rates were below 1%.
“If interest rates when to 5% and you have to fund $31 trillion, you will end up paying $1.2 trillion in debt. The American defense budget is only around $800 billion. That is unsustainable,” he said.
With a natural cap in interest rates, Polleit said that gold remains an attractive asset. He added that in a traditional portfolio, he doesn’t see any vital role for government bonds.
“I don’t think holding bonds is a very good long-term solution because real interest rates are going to remain negative,” he said.
As for how investors should position their portfolio, Polleit said he likes holding about 60% in globally diversified stocks or ETFs and the other 40% in precious metals. In a breakdown of his precious metals holding, he added that he would hold about 70% in gold and the other 30% in silver.
“If you are wondering if the current gold price is a good buy, I would say that in the long-term, gold is still cheap given the current conditions,” he said.
Posted by:
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com