Gold set to soar further

US debt ceiling impasse, weak dollar spur safe haven purchases


Issac John

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Central bank gold buying has also offered strong support to higher trading levels. — KT file
Central bank gold buying has also offered strong support to higher trading levels. — KT file

Published: Mon 15 May 2023, 4:46 PM

The economic fallout of the US failing to raise the debt ceiling and defaulting on its financial responsibilities will see the dollar coming under increased pressure, providing a tailwind to gold prices.

The US may default as soon as June 1, causing a global economic catastrophe, if the limit is not raised by Congress before then.

Precious metals analysts believe that if the US government runs out of cash to pay its bills, gold is likely to benefit, and its prices could climb immediately to $2,100.

Lsst week, gold was precariously poised with growing uncertainty around a global recession keeping the precious metal supported. The yellow metal appeared unable to push convincingly above the $2050 level with a growing case from a technical perspective for bearish interest.

"If the dollar goes down, gold will rise because gold is an alternative asset," BCA Research's chief FX strategist Chester Ntonifor said.

The debt ceiling crisis is putting further pressure on the dollar which is already facing an erosion of credibility and reputation as the global reserve currency and a safety asset.

Investment consultants say diversification across asset classes, sector,s and regions is investors’ best weapon to ride out choppy waters. But considering the tightening squeeze on the dollar, investors should perhaps particularly ensure that their portfolios are properly diversified in terms of currencies and gold in order to mitigate risk and seize opportunity during these times of heightened volatility.

During the 2011 debt ceiling crisis, gold ended up climbing in August and September 2011, breaching $1,900 an ounce for the first time and hitting a record high at the time of $1,910 an ounce. However, the eventual resolution of the debt ceiling marked a peak in gold

Central bank gold buying has also offered strong support to higher trading levels, with last year's record-high levels spilling over into this year, analysts said.

"If you were to model central banks buying gold at current levels, and you look over the next five to ten years, then you would see gold over that timeframe at $2,600," Ntonifor was quoted as saying in an interview.

Central bank buying started almost ten years ago, and Ntonifor does not see this trend reversing, with China, India, Russia, and Turkey standing out as major gold buyers recently.

China held 66.76 million troy ounces of gold at the end of April, up from 66.50 million ounces at end-March. The value of China’s gold reserves rose to $132.35 billion at the end of April from $131.65 billion at the end-March.

Gold should be trading at $2,200 an ounce right now, with the greenback overvalued by around 20 per cent, according to BCA Research.

Gold is one of the best perming assets in 2023 for a reason. The macro outlook and investor demand support higher prices.

BCA Research sees gold climbing to the $2,200 level within the next nine to 16 months. This is already where gold should be based on the strategist's models.

Analysts said gold's primary driver is the dollar, which has been weak. And even though the global de-dollarization trend is somewhat exaggerated, it is apparent that the greenback is overvalued by around 20 per cent.

The US currency used to be about 70 per cent of global reserves in early 2000. Right now, it moved down to 60 per cent. Gold's share increased from 6.0 per cent in 2015 to 10 per cent.

Ntonifor said looking further down the road, the dollar will be heading lower due to fundamental factors. "It is the most expensive G10 currency. It is overvalued by 20 per cent, according to our models. You'll be seeing that adjustment. And if the dollar falls, gold catapults higher. If the dollar goes down, gold will rise because gold is an alternative asset."

Analysts see inflation data versus inflation expectations as another key driver for gold this year. "There is a disconnect between what's actually happening to inflation and what the market is pricing in terms of where inflation is going to be," Ntonifor noted. "And gold has decoupled from the market-based inflation measures. But inflation is still too high. And we know from history that one of the perfect attributes of gold has been to protect purchasing power. In that sense, if inflation remains sticky, you'll get a breakout in gold."

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