Gold Digger: Stagflation to push gold through $US2,200 later this year, expert says
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Our Gold Digger column wraps all the news driving ASX stocks with exposure to precious metals.
‘Stagflation’ is the unpleasant combo of high inflation, slower economic growth, and steady/ increasing unemployment.
For Central Banks, it’s a pain in the backside. But for gold, it’s a good thing.
The precious metal has historically outperformed during periods of high inflation/ slowing economic growth, of the type we are seeing right now.
Singapore’s United Overseas Bank (UOB) says price should reach $US2,200/oz in Q4 this year.
“This mounting stagflation fear, coupled with strong safe haven in-flows, have now taken over as the dominant drivers for gold price, muting the negative impact from the anticipated rate hikes from the U.S. Federal Reserve,” UOB head of markets strategy Heng Koon How says.
There are renewed in-flows to gold ETFs, he says.
There will also be more demand from central banks, Heng says.
“Various central banks, particularly in the Emerging Market space, continue to diversify their reserve holdings into gold,” Heng said.
“It is likely that this onset renewed geopolitical risk due to the Russia-Ukraine conflict will reinforce this diversification trend.”
And while we are on the topic of Central Banks …
Since the 2014 invasion of Crimea, the Russian government has increased its gold stockpile as a hedge against further financial sanctions.
Now the country has the world’s fifth biggest hoard of the precious metal, worth up to $US100 billion — $US140 billion.
It keeps getting larger. In February, the Bank of Russia announced that it would resume gold purchases on the domestic market after a bunch of its financial institutions were removed from the SWIFT bank messaging system.
Yesterday, The U.S. and its allies officially prohibited all transactions with Russia involving gold, one of its financial lifelines.
But will it work?
Domestic gold reserves are physical assets held inside vaults which, bar a full-scale invasion of Russia, can never be seized by foreign powers.
But it is also hard to move, so Russia would need to rely on its ever-decreasing list of allies – like India and China — to liquidate its stash.
Unfortunately, India and China are two of the biggest gold traders in the world.
They could help out Russia in the same sort of way Russia assisted the heavily sanctioned Maduro regime in Venezuela – by physically moving tonnes of gold bars into unregulated markets around the world.
This week the gold bugs were back.
“The reasoning behind the rally is as tenuous as the equity rallies. Suddenly, gold has become an inflation hedge once again, and a hedge against higher US yields, go figure that one out,” Halley says.
“I believe haven buying into the end of the week, and fast-money buying the break of $1950.00 are more likely.
“As such, I remain sceptical about the gold rally. Its longer-term price action will turn constructive only if US yields cap out and US Dollar weakness returns, or if President Putin starts using weapons he shouldn’t in Ukraine.
“Gold has shown more than once recently that prices climb slowly up the stairs, and then jump out of the 10th floor window, and I believe those risks remain.”
Gold has nearby resistance at $1965.00 and $1975.00 an ounce, followed by $2000.00 where Halley expects option-related sellers to be lying in wait once again.
Support lies nearby at $1950.00 and $1938.00 an ounce, he says.
Here’s how ASX-listed gold & silver stocks are performing:
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