Gold price at $4,000 remains possible despite strong macroeconomic statistics

Gold prices remain firm, despite easing geopolitical tensions and inflation figures exceeding the Federal Reserve's 2% target. The Fed's preferred inflation rate, core personal consumption spending

index (PCE) (which excludes food and energy), totaled 2.8% in April. The statistics They were released on May 31. US unemployment rate has also remained low; the figure reported in April rose to 3.3%. It may seem that the Federal Reserve has no reason to ease its monetary policies. But despite the bad news for the gold market, gold is still trading above $2,300. But there is still more to come. citi group (c) expects one ounce of gold to reach a price of $3000. However, in my opinion, gold should be worth even more than that, and more bullish news is yet to come.

Gold at $4000: summary of the previous article

In my previous article on gold, I wrote about the undervaluation of the precious metal and its potential to appreciate much higher, possibly reaching $4,000 per ounce.

I also highlighted that, despite high interest rates, the price of the precious metal has proven resilient. Historically, gold has always reacted to lower interest rates and quantitative easing (QE). I also noted that geopolitical risks and unexpected crises could be strong growth factors for gold.

As I write this, macroeconomic statistics suggest that the US economy is too strong right now. In the view of many investors, geopolitical tensions have eased. Since the fall of 2023, the world has been paying close attention to Israel's war against Hamas. There are hopes that Israel will agree to a temporary ceasefire agreement. However, this hope could be in vain. Despite the strong macroeconomic statistics, especially the low unemployment rate, I remain bullish on gold. Therefore, my highly bullish position remains unchanged.

Economic data

The core PCE index increased by 2.8% compared to the same period last year. There were no changes from March and April's figure was in line with expectations. In monthly terms, this indicator increased by 0.2%, as expected. The price index for personal consumption expenses, for its part, rose to 2.7%, also quite in line with previous months.

Consumers demonstrated that they continue to spend despite high price levels. Personal income statistics also show some resilience.

This also suggests that consumer optimism is high. At the same time, this means that consumers don't have much cash left to save, which was not the case in 2020 and 2021, when Americans received a large amount of money from the government. This was all part of COVID relief spending to support consumption. However, this suggests that inflation is still above the Federal Reserve's 2% target, while personal income and spending are strong.

The US labor market is also quite strong. The April 2024 unemployment rate currently stands at 3.3%, roughly in line with previous statistics.

Recent unemployment statistics are also close to levels seen in 2019 before the pandemic, when the labor market was particularly strong.

Overall, we can say that the economy is not slowing down, while inflation numbers are above the Federal Reserve's 2% target. That is why some analysts and market experts say fewer rate cuts are expected this year.

What will happen if the Federal Reserve does not ease?

But the key question is: what will happen to the US economy if the Federal Reserve does not ease its monetary policies quickly enough? There are different opinions on the subject. Generally, higher rates over a long period of time risk causing a recession. But some experts say the U.S. economy can sustain higher rates for longer. Among them is David Kelly, Chief global strategist at JP Morgan Asset Management. Given that the U.S. economy is strong, consumer spending and inflation numbers are high, and the unemployment rate is fairly low, higher rates for longer may be appropriate for the economy, as long as they don't stay high for too long. a long time. Higher rates could cool the economy slightly and allow the Federal Reserve to meet its inflation target. So if this scenario turns out to be true, there will be a “soft landing” for the US economy.

At the same time, it's easy to go too far with higher rates for longer because tighter monetary conditions would eventually send the economy into recession. What would happen to the gold in this case? Well, all asset classes lose value except the US dollar when the market starts to panic, but then they take off when the Federal Reserve relaxes monetary conditions and investors start buying various asset classes. This also applies to gold.

This is how gold behaves during recessions. The chart below shows the 100-year history of gold prices; Recessions are shaded in gray areas.

Gold price history

The most obvious case of gold's correction and subsequent rise to new all-time highs was in 2008, when the price of the precious metal fell from $1,000 to below $800 and then rose to $1,800. This was due to Federal Reserve stimulus and investor panic.

In reality, something similar could happen now, meaning the next recession could even spur a longer rally in gold.

But it is not the only bullish factor for gold.

Relief of geopolitical tensions

On Friday, US President Joe Biden publicly described Israel's latest ceasefire proposal—one that could lead to a permanent truce and that Hamas might be willing to accept. But it seems unlikely that Israel will agree to a permanent ceasefire agreement. From the country Prime Minister Netanyahu He risks losing his job if he accepts the deal due to pressure from the far-right political elite. Furthermore, the war in the Middle East is not over. The situation seems risky. Therefore, it seems to me that any major provocation in the region can force the most important countries, especially Israel and Iran, to take action.

Relations between Russia and the United States, as well as relations between the United States and China, have not improved recently. They remain a cause of concern for many investors. Therefore, any news on that front must be monitored carefully.

Logically, any major uptick in geopolitical risks can push gold prices even higher.

Money supply and gold valuations.

Citigroup predicts that gold prices will reach $3,000 per ounce in the next 6 to 18 months. According to the bank, gold's recent rally has been facilitated by geopolitical risks and coincides with record stock market levels.

Goldman Sachs (GS) raised its year-end forecast to $2,700 per ounce, thanks to the Federal Reserve's interest rate cuts expected later this year.

However, as I mentioned in my other gold articles, I consider $4,000 per ounce to be a fair price as of now. The reason for this is the record money supply in the US economy, despite record interest rates. A high supply of dollars means that the real value of the dollar is quite low. Obviously, the greater the money supply, the lower the dollar. The low dollar has traditionally meant high gold prices.

The ratio between money supply and gold in the United States is quite high. However, it was even higher in the early 1970s and 2000s. These periods preceded explosive growth in the price of gold. This can be clearly seen in the following graph.

Right now, gold is undervalued compared to the US money supply.

Money supply/gold ratio in the US

Well, you might be wondering why gold is objectively worth $4,000.

The chart below, taken from the Federal Reserve website, shows that the money supply has doubled since the pandemic, as it did after the 2008 crisis. Gold prices should have doubled as well because the relationship is direct. However, this has not happened, which means that the precious metal has great growth potential and should be worth close to $4,000.

Downside risks

In my opinion, the downside risks are obvious.

The first and most important is higher rates for longer, which is bad news. Recent macroeconomic statistics suggest so. However, if rates do not decrease over time, this will trigger a recession, which will eventually lead to a large-scale rally in gold.

Second, geopolitical risks may decline. The war between Israel and Hamas could end and relations between Israel and Iran could improve. Tensions between the United States and Russia and the conflict between the United States and China over Taiwan may not escalate. In this case, the demand for safe havens like gold might not be high. But in my opinion, it is highly unlikely that any of these conflicts will escalate this year.

Conclusion

Even though recent macroeconomic statistics hint that there will be fewer rate cuts than expected this year, gold remains undervalued despite the recent rally. Tensions in the Middle East do not seem to end soon because the conflict between Israel, Hamas and Iran seems to be long-lasting. Thanks to the very high money supply, gold should be worth twice as much as it is currently.