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Thursday, September 21, 2023

Recession will help gold to return above 2 thousand dollars

Gold has been at an imaginary tipping point for a long time. Its value could drop significantly below the $1,900 per troy ounce mark or, on the contrary, return well above the $2,000 level. Macroeconomic developments in the coming months will shed more light on the price development of the precious metal. More arguments are currently in favor of the fact that it will be necessary to pay extra for the yellow metal.

The dollar trumped gold

It was surprising to many why the price of gold fell during the last inflationary year. After all, gold was supposed to be a protection against inflation. However, the situation is much more complicated. It turned out that gold is not so much a protection against inflation as it is against systemic risks. It had a strong competitor – the US dollar.

As the US central bank began raising interest rates, the dollar became increasingly attractive. While many investors look at current inflation and current interest rates on deposits, long-term inflation expectations and bond yields are key to investing. The difference between the expected dollar yield over the next 10 years and US inflation expectations over the next 10 years reflects the real 10-year interest yields.

Real yields began to rise sharply as interest rates rose, reaching levels of more than two percent earlier this year. It was the highest value since the global financial crisis of 2008. The purchase of dollar bonds is thus the most attractive in the last 15 years. But what is important is that it is positive, at the level of two percent. Anyone who owns super-safe 10-year US government bonds should earn two percent in net over the next decade. If he holds gold, he earns no interest. The dollar therefore trumped gold.

Gold trumps the dollar

If real interest rates remain high or continue to rise, gold has little chance of undercutting the US dollar. However, it is questionable how long the American economy can withstand the onslaught of the highest interest rates in 15 years with the current record high debt burdening the economy. Sooner or later, a recession will come, which will push interest rates down.

Lower interest rates will cause real returns to fall and the dollar will lose its attractiveness, which gold will gain. In other words, as the economy weakens, gold will rise. If a recession comes, it will grow even faster. And this is also the reason why gold has remained stagnant below the level of two thousand dollars for the last few months. That’s $300 an ounce more than a year ago.

However, even when the economy slows down, the movement of gold against the dollar is not completely predictable, as it depends on several factors. One of them is dollar liquidity. If what happened last October, when there was a big scramble for scarce US dollars, the dollar would still be strong and maintain a premium against gold. However, both instruments would strengthen against the euro, which would lose, as it usually does, in case of problems.

Bankers are buying headlong

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