According to one market strategist from Crescat Capital, Tavi Costa, volatility has increased in the markets as the Federal Reserve maintains a hawkish stance and continues to push the economy towards a recession. The cost of gold compared to stocks and bonds makes it an ideal portfolio diversification tool.
Costa says gold prices could rise above $2,000 per ounce as the world continues to grapple with higher interest rates, growing inflationary pressures, and a global economy drowning in debt.
There are three components, or risks, for the global economy that could support gold prices. First, the U.S. government may fail to fulfill its debt obligations. Although this risk is low, it remains within the realm of possibility. Second, a recession caused by Federal Reserve tightening. Third, the level of U.S. debt, which has led to a sell-off in the bond market.
According to Costa, the recession could persist for much of 2023. His research highlights that not only is the yield curve the most inverted in recent history, but 90% of the curve is inverted, meaning long-term rates are lower than short-term yields across the spectrum.
When 70% of the yield curve becomes inverted, investors buy gold and sell the S&P 500.
However, according to research, foreign buyers of U.S. debt are currently at their lowest level in the past 19 years.
Currently, central bank purchases of gold have fundamentally changed the precious metals market. The fact that banks are buying gold further underscores deglobalization and the need to hold neutral assets.
As interest rates rise worldwide, volatility in currency markets also increases. Under such conditions, central banks need to increase their reserves with a greater quantity of precious metals.
Historically, gold accounted for about 40% of all global reserves. In the early 1980s, gold accounted for over 70% of currency reserves. According to research, if central banks' gold reserves return to historical averages, they would need to buy $3.2 trillion worth of the precious metal.
2022 was a worrisome year for everyone. Currently, for diversification, it is advisable to have no more than 30% in stocks, 20% in fixed income, 30% in gold, and 20% in a broad commodity basket in one's portfolio.
