Rising geopolitical uncertainty could create a war-time economy that drives gold to $2,000 - BCA

Rising geopolitical uncertainty could create a war-time economy that drives gold to $2,000 – BCA

(Kitco News) – Rising geopolitical tensions could provide critical support to gold and possibly push prices above $2,000 an ounce, according to commodity analysts at BCA Research.

In a research note published late last month, the Montreal-based research firm said it was increasing its year-end spending gold the price target at $2,000 an ounce as wartime economies begin to establish themselves in the West and the risk of “fiscal dominance” continues to grow.

“The risk of fiscal dominance, when monetary authorities set rates low, will intensify as government policy driven by environmental and defense imperatives continues to expand in the West,” wrote strategist Robert Ryan. Head of Commodities and Energy at BCA and lead author. of the last report.

Since BCA’s comments last month, political relations between the United States and China have deteriorated further after the United States shot down a suspected Chinese spy balloon two weeks ago.

This weekend, the United States fueled fears that the war in Ukraine could continue to escalate as China plans to provide Russia with “lethal support”.

At the same time, China held joint military exercises with Russia and South Africa as the war in Ukraine reached the one-year mark.

Ryan noted that the rise in geopolitical uncertainty comes as economic conditions continue to deteriorate. He added that in the current environment, he does not see the Federal Reserve raising interest rates beyond 5% this year.

At the same time, BCA expects the ongoing conflict in Ukraine to continue to disrupt commodity prices, keeping inflation high. Ryan added that market disruptions, Western countries’ commitment to developing green energy infrastructure and increased defense spending are all factors that will continue to support higher inflation.

Analysts said they see headline inflation hovering between 4% and 5% over the next few years.

“Commodity prices will remain volatile this year as well, as governments – mainly in the EU – interfere in markets,” the analysts said in the report. “If Russia’s position in the war deteriorates, Putin and his government could become irrational actors and take more extreme measures. global uncertainty is high and U.S. real rates are low, investors will flock to gold as a safe investment.”

Another positive aspect for gold amid rising geopolitical tensions is the growing impact on the US dollar. The BCA said it expected a marginal increase in petro-yuan trade as nations bought oil in the Chinese currency.

Although this trend will not see massive growth this year, BCA said it is still enough to disrupt the US dollar’s role as the world’s reserve currency, and a weaker US dollar is one less hurdle. for gold prices.

“Our geopolitical strategists do not expect Saudi Arabia to store most of its wealth in currencies other than the dollar, or to break away from the United States and realign its national strategy with China, but they accept that the Saudis can hedge against the dollar,” the analysts said.

The BCA also noted that the global dedollarization trend should support gold as central banks continue to diversify their holdings in 2023.

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