Gold Could Go to $2,000 Due to Geopolitical Uncertainty
Jose Nino
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According to analysts at BCR Research, growing geopolitical tensions could push gold prices upward, even going north of $2,000 an ounce.
In a research note that it published in late January, the research firm said it was increasing the projected year-end gold price to $2,000 an ounce as West countries transform into war-time economies and the risk of “fiscal dominance” continues growing.
“The risk of fiscal dominance, when monetary authorities peg rates at low levels, will intensify as government policy driven by environmental and defense imperatives continues to expand in the West,” Robert Ryan, chief commodity and energy strategist at BCA, wrote in the most recent report.
Since BCA’s comments last month, political relations between the U.S. and China have deteriorated further after the U.S. shot down a suspected Chinese spy balloon two weeks ago.
As geopolitical tensions rise due to the Russo-Ukrainian War raging on and rumors about China potentially supplying military aid to Russia, BCR Research believes that this volatility could potentially push gold prices upward.
Ryan opined that he doesn’t see the Federal Reserve hiking interest rates beyond 5% in 2023 given the present economic environment.
In addition, BCA projects that the current conflict in Ukraine will continue to disrupt commodity prices, thereby keeping inflation high. Ryan observed that market dislocations, Western nations’ moves to erecting green energy infrastructure, and increased defense spending are all contributing factors towards higher inflation.
The analysts believe that inflation will hover between 4% and 5% in the next few years.
“Commodity prices will remain volatile this year as well, as governments – primarily in the EU – interfere in markets,” the analysts observed in the report. “If Russia’s position in the war deteriorates, Putin and his government may become irrational actors and take more extreme measures. One of these includes a cut-off in global crude and/or oil products supply, resulting in a global oil supply shock. While global uncertainty is high and US real rates are low, investors will flock to gold as a safe-haven investment.”
Another aspect working in gold’s favor is how geopolitical tensions are impacting the US dollar’s status as the world reserve currency. BCA believes there will be a marginal increase in petro-yuan trading as countries start buying oil in China’s currency — the yuan.
While BCA concedes that this trend won’t go into hyperdrive in 2023, BCA believes this trend is still strong enough to undermine the US dollar’s role as the world’s reserve currency. Overall, Kitco noted that a “weak US dollar is one less headwind for gold prices.”
“Our geopolitical strategists do not expect Saudi Arabia to store the bulk of its wealth in currencies other than the dollar, or to break with the US and realign its national strategy with China, but they do accept that the Saudis can hedge against the dollar,” the analysts highlighted.
Gold has traditionally been one of the refuges for people who want to preserve their wealth in times of economic uncertainty. As inflation grows stronger across the West and geopolitical disruptions abound, people will naturally flock to gold as a safe haven asset. It’s simply a more stable store of value and wealth preserver in times of economic turmoil.
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