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Despite current struggles in the gold market below $1,900 an ounce, analysts believe that there is still great value in the precious metals space and that it is only a matter of time before gold and silver prices go higher as investors underestimate the risk of a recession this year.
In an interview with Thorsten Polleit, Chief Economist at Degussa, stated that he expects gold to remain strong through 2023 as investors seek to protect their purchasing power and hedge against growing economic uncertainty. Polleit’s official price forecast predicts that gold prices will reach a peak of $2,200 an ounce with an average price of $2,000 an ounce in 2023. He also anticipates silver prices to peak around $29 an ounce this year with an average price of $26.
Polleit remains highly optimistic about gold as inflation continues to pose a significant threat to consumers and the global economy. Despite a recent fall in consumer prices from their highs last summer, Polleit pointed out that central bank tightening has reduced the global real money supply and liquidity in the economy. The declining money supply has a similar impact on consumers as rising consumer prices.
Polleit stated that central banks worldwide are now trying to undo the massive amounts of liquidity they unleashed in 2020 in response to the global COVID-19 pandemic, but risk creating a new recession in the process. He noted that since the end of 2019, the Federal Reserve’s M2 money supply increased by 40%, while the European Central Bank’s money supply increased by 25%.
Despite a healthy labor market so far this year, Polleit stated that markets have largely dismissed the possibility of a recession, but one reason for this is that they are aware of the Federal Reserve’s hawkish stance and know it will only go so far. He also pointed out that markets no longer have confidence in central banks to normalize monetary policies, as they can no longer function without a safety net provided by central banks. In case of trouble in the economy, he expects the Federal Reserve to quickly provide that safety net.”
Despite some Federal Reserve members making hawkish statements, Thorsten Polleit, chief economist at Degussa, doesn’t anticipate the central bank raising interest rates to 5%. He believes that they may cut rates later in the summer if market conditions worsen.
The growing U.S. government debt is also limiting the Federal Reserve’s ability to take aggressive action. In 2021, the government spent approximately $350 billion on debt service when interest rates were below 1%. If interest rates were to increase to 5%, the government would have to pay $1.2 trillion to service its debt, which is unsustainable given the defense budget is only around $800 billion.
Due to the natural limit on interest rates, Polleit views gold as a desirable investment. He does not see government bonds having a crucial role in a traditional portfolio, as real interest rates are expected to remain negative.
Polleit recommends a portfolio that is 60% globally diversified stocks or ETFs and 40% in precious metals, with 70% of the precious metals being in gold and 30% in silver.
In his opinion, the current gold price represents a good long-term investment opportunity given current conditions, as gold remains relatively cheap.