SEATTLE (Scrap Monster): Gold posted a small gain in 2022, and it was one of the best-performing assets of the year. Nevertheless, there has still a perception in the mainstream that gold is dead. But that perception may be changing. In a recent note, Bank of America commodity strategist Michael Widmer said gold will be a “mainstay” in portfolios over the next several years.
The yellow metal faced significant headwinds in 2022. The Federal Reserve’s “war on inflation” meant higher interest rates and a strengthening dollar. Widmer said these dynamics have “prompted some soul-searching among market participants” when it comes to gold.
Wilmer said he is bullish on gold in 2023 and he thinks the bullish environment will persist for several years.
What exactly is that macro backdrop? Bank of America head of US economics Michael Gapen said he anticipates a mild recession in 2023 and that easing inflation will allow the Federal Reserve to pivot away from its tight monetary policy.
Peter Schiff agrees that there is a good chance the Fed will cut rates this year. And he thinks there is an even better chance the central bank returns to quantitative easing, whether it cuts rates or not. But Schiff said the Fed won’t pivot for the reason mainstream analysts such as Gapen think. It won’t be because of a victory in the war against inflation.
But no matter the reason, any Fed pivot is bullish for gold, and that’s why Wilmer thinks investors will have renewed interest in the yellow metal.
With the big run-up of bitcoin over the last couple of years, many people proclaimed gold was dead. But Wilmer noted that gold and crypto are now following very different trajectories and have become essentially uncorrelated.
The BoA note also referenced the recent surge in central bank gold buying and pointed out that some countries are diversifying away from the dollar. Gold can serve several functions, including serving as a means of payment and a store of value. It also mitigates counterparty risk.
While I find Bank of America’s macroeconomic analysis lacking, we end up drawing the same conclusion – the Federal Reserve will take its foot off the accelerator and return to loose monetary policy. After all, the global economy is built on easy money, debt, and money creation. It simply can’t operate without it. As Jim Grant said, “Certainly, the slowing rate of the rise in inflation is to be celebrated. It’s nice, but we are still left with a system that is inherently inflationary.”
At the end of the day, inflation and loose monetary policy are bullish for gold.
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