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Chronic Economic Uncertainty: Is It Gold’s Favorite Ally?

Isaac Nuriani    |
Mar 4, 2022
  • Economists disagree whether short-term events will be good for gold
  • It’s more important to look at the long term and general uncertainty
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These are uncertain times for long-term savers.

That statement is accurate even if all you think about is the Russian invasion of Ukraine. As you likely know, global financial markets have demonstrated significant volatility during this time of Ukranian strife.

But when it comes to nest egg stability, savers like you have a lot more to be concerned about beyond the unsettling events in Eastern Europe right now.

Inflation – as represented by the U.S. consumer price index (CPI) – is at a 40-year high. The central bank is expected to move interest rates higher over the next two years in an effort to bring down U.S. CPI inflation. And as they do, the possibility of recession increases.

Oh, and by the way, the national debt recently topped 30 trillion dollars.

And gold is caught in the middle of all of it.

The price of gold spiked roughly 8% against the backdrop of the Russia-Ukraine conflict. But where gold goes from here is subject to some disagreement – among very bright people who are paid a lot of money to analyze markets and metals.

We’re going to talk more about that disagreement shortly. But the fact that there is right now no clear consensus on gold’s prospects as a reliable hedge says everything about why I like owning some of the yellow metal. Since the start of the millennium, we’ve been treated to a regular diet of global economic and geopolitical uncertainty. And over this period, the price of gold has strengthened. Could it be that chronic uncertainty – more than any one adverse condition – is gold’s favorite ally?

Morgan Stanley: We Project Six Rate Hikes – and a Headwind for Gold – This Year

I recently ran across a Nikkei Asia article that speaks to the tug-of-war taking place between two distinct analyst viewpoints on the near-term prospects for gold.

As Nikkei Asia describes it, two analyst “camps” have formed over gold. One says to look for gold to strengthen as high inflation and global turmoil remain prominent. The other points to two things as reasons to be more subdued about the metal’s outlook: (1) the expectation of rising interest rates and (2) the likelihood that gold’s conflict-cued spike won’t last.[1]

For example, Nikkei Asia notes UBS Investment Bank’s assessment that the recent jump in gold prices is temporary. Their view is that prices will retreat as the dividend from global tension starts to disappear and the metal once again is looked at through the lens of macro fundamentals such as interest rates.

Rich Kelly, head of global strategy at TD Securities, recently said the same thing in a research note.

“Historically, safe-haven flows have only provided a short-lived boost for precious metals demand,” Kelly said, “which suggests the bulk of the flow-through implications for gold and silver prices will come from the market’s assessment of implications for rates markets.” In other words, as UBS said, the increase in gold’s price that has been triggered by geopolitical conflict likely will evaporate, and what really will matter for the metal is the dynamic between interest rates and the economy.

Morgan Stanley also thinks gold is headed lower. Nikkei Asia cites the investment banking giant’s expectation that the Federal Reserve will boost rates six times – and 150 basis points higher – this year.

Noticeably, each of these firms seems to discount gold’s value as an inflation hedge. But as I noted earlier, the “experts” are hardly in total agreement.

Goldman Sachs: We Project Gold as High as $2,500 Per Ounce

Among those in the pro-gold camp, notes Nikkei Asia, is Goldman Sachs, which recently raised its 12-month price target from 2,000 dollars to 2,150 dollars. A recent Kitco News article goes even further in examining Goldman’s projection, detailing the bank’s suggestion that a “structural” shift to higher inflation could drive gold up to 2,500 dollars.[2]

“We estimated that if inflation were to structurally move to 4%, gold could hit $2,500/oz. based on the historical gold inflation relationship,” Goldman analysts write. “We also estimated that gold would get somewhere close to this level if U.S. gold ETFs would move back to their 2011 highs. Therefore, we think there is considerable upside potential in gold in a scenario where inflation increases significantly.”

To clarify, when Goldman refers to a “structural” move to 4% U.S. inflation, they’re talking about periods of consistent inflation that averages at or around 4% for an extended period. This would be the opposite of “transitory” inflation, which refers to an inflation spike that’s expected to last just a short time. You may recall that until recently, the higher inflation numbers we’ve seen for the past year were being dismissed by many – including Federal Reserve Chairman Jerome Powell – as “transitory.”

For Goldman, the robust gold viewpoint is based not only on high inflation concerns but on the other side of the interest-rate coin, as well. Gold’s reputation among many is as a reliable hedge against both hot-running inflation AND economic downturn.

I wrote a few weeks ago about the projection by some observers that gold will strengthen going forward regardless of whether the nation sees chronically high inflation or falls into recession based on an overzealous Fed tightening regime. Well, Goldman essentially is saying the same thing: If we don’t get high ongoing inflation because the central bank tightens considerably from here, the fallout from those severe rate hikes could include a potentially gold-boosting recession.

“While there is not yet talk of recession,” Goldman writes, “our economists forecast a material deceleration in U.S. growth, while the imminent prospect of a new hiking cycle is leading to a risk-off environment across long-duration asset classes. For investors looking for a way to hedge their portfolios from risks of a growth-slowdown and falling valuations, we believe a long gold position would be more effective in the current macro environment.”[3]

“As U.S. growth continues to slow in 2022, the market perception of recession probability could increase further,” Goldman analysts add. “This sets gold up for greater investor interest despite rising rates.”

So there it is. Reputable global investment banks – all staffed by plenty of smart folks – holding significantly different outlooks for gold’s prospects ahead. What’s an earnest retirement saver to do?

Let me ponder something out loud and see if it makes sense to you.

My View: It Could Be Prudent Not to Get Distracted by Shorter-Term Gold Price Moves

I think it can be easy to get distracted by gold’s reputation as an asset to be owned specifically to hedge against inflation hedge and significant economic or geopolitical uncertainty. Here’s why I say “distracted.”

Take what’s going on with gold in the context of the Russia-Ukraine troubles. Financial news publications generally attribute last month’s 8% gold spike to the intensification of global economic uncertainty in recent weeks – a global economic uncertainty arising from global geopolitical uncertainty.[4]

Excitement over seeing an 8% increase in gold’s price over a short period is understandable. But as I suggested earlier, professional observers note little evidence that higher gold prices on the back of the conflict will be sustained. Such increases rarely are. You may recall that the U.S. and Iran traded rockets and missiles at the very end of December 2019. Over a period of just two weeks – from that last week of December through that first week of January 2020 – gold appreciated nearly 5% as the possibility of war grew between the two countries. But as tensions subsided, the “conflict premium” of gold disappeared, as well.

Now, let’s go “bigger picture” and look at how gold has performed since the beginning of the millennium. From January 2001 through now, gold has appreciated roughly 600%. That appreciation occurred through a variety of economic and geopolitical challenges, including 9/11, the financial crisis and the ongoing pandemic.

What am I suggesting? Just this: It can be helpful to identify specific, shorter-term environments and circumstances that could be positive for gold. But perhaps it could be even more important to recognize the capacity for gold to thrive longer-term when the economic environment is characterized regularly by discrete periods of uncertainty.

The shorter-term outlook for gold expressed by analysts at UBS, TD Securities and Morgan Stanley seems reasonable. But so does the outlook expressed by Goldman analysts. And none of us – not even the really smart folks at these multinational investment banks – has a crystal ball.

[1] Rurika Imahashi, Nikkei Asia, “Gold price swings as Ukraine crisis sharpens market divide” (February 28, 2022, accessed 3/3/22).
[2] Neils Christensen, Kitco News, “Goldman Sachs long gold, sees prices rising to $2,150” (January 26, 2022, accessed 3/3/22).
[3] Ibid.
[4] Brian Sozzi, Yahoo News, “Gold prices pop to one-year high as Russia invades Ukraine” (February 24, 2022, accessed 3/3/22).






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