Gold's potential to hit a unprecedented peak this year attributed to…
Rewritten Article:
Gold's Role Amidst Turmoil: Mark Valek's Perspective on High Inflation and Its Impact on Gold
By Jesus Carver
Mark Valek, a partner at Liechtenstein wealth manager Incrementum and co-author of the renowned "In Gold We Trust" report, still expects a surge in inflation and here's what it means for gold.
The Struggling Gold Market: BORSEN ONLINE's Interview with Mark Valek
Gold, known as a safe haven in tumultuous times, offers protection against inflation. With the ongoing pandemic, supply chain issues, skyrocketing inflation, the Ukraine war, and stock market volatility, gold seems to have disappointed investors lately. Since March, the gold price has plummeted. But what went wrong?
Valek's Analysis:
In a nutshell, the sudden shift in interest rates in the US has played a significant part in gold's slump. With expectations that central banks, especially the Federal Reserve, will tame inflation and that the inflation problem won't last long, investors have been moving their money elsewhere.
However, Valek argues that gold has performed better than most stock indices and bond investments in euros this year, despite its poor performance. Gold's inability to meet expectations in dollars has been primarily due to this year's interest rate hikes in the US.
A Look at 2021: Not So Crisis-Free for Gold
This year has not been all smooth sailing for gold either. In 2020, during the corona crash, the aid and especially the expansion of central bank balance sheets (i.e., mammoth money printing worldwide) led to a swift rise in gold's price. But when these events were deemed to be temporary, the gold price consolidated. In Valek's view, gold's potential was stifled due to this perception.
Peak Inflation? Gold's Future
Recently, the Federal Reserve has boosted interest rates substantially, which could bring a temporary relief from inflation. However, Incrementum's own inflation signal indicates that the rising inflation momentum might be slowing down for now. As commodity prices and inflation-indexed bonds have decreased in recent weeks, and the dollar's strength is a signal for falling inflation, Valek anticipates shorter-term inflation rates to drop.
Stagflation On The Horizon
Despite this, Valek predicts that we are already experiencing stagflation. With the US recently entering a technical recession and high inflation rates, we see stagflation as inevitable, although its duration remains uncertain. The typical description of stagflation is low or negative growth coupled with high inflation. The question isn't if stagflation is on its way but how long it will last. We expect to encounter waves of inflation in the medium term. The first wave might be nearing its end, with the second wave possibly delaying any further interest rate hikes in the US as inflation rates ease or oil prices continue to fall.
Low Inflation Anytime Soon?
According to Valek, the 2010s mark the beginning of an inflationary decade. Given the massive debt accumulation resulting from COVID and the Ukraine war, the prospects of budgetary restraint and indefinite money printing seem bleak. Valek doubts that we will return to a stable 2% inflation rate in the long run, given ongoing deglobalization, intense rearmament, and a fundamental shift in the entire energy sector.
Raised Interest Rates: A Risk for Gold?
The main question for this year is just how much higher can interest rates actually go? The European Central Bank is grappling with public debt issues in some Eurozone countries, and raising interest rates too much could trigger a Euro crisis 2.0, as southern Eurozone countries might struggle to manage their financing.
The Gold Outlook: $4,800 by 2030
Valek's predictions call for a gold price of $4,800 by 2030, around 170% above today's prices. But what if the Fed continues raising interest rates? Possibly a risk scenario for gold.
Gold: The Safe Haven as an Investment
Gold provides no recurring income, but it serves as a perfect store of value during tumultuous times. Leaving risk behind, gold doesn't need to pay interest because it carries no bankruptcy risk and will appreciate over time in a fiat currency system, as the money supply is regularly expanded faster than the gold supply.
The Balance: Safety Gold and Performance Gold
Valek suggests holding both safety gold and performance gold in your portfolio. Safety gold should be kept physically offsite as an emergency fund, while performance gold can be invested in ETFs. Performance gold can also be secured through mining stocks, futures, or options, but don't forget to maintain diversification.
The Current State of Gold Producers
Incrementum has seized the opportunity of recent price drops to secure significant stakes in gold miners. The miners are grappling with inflation costs, but if the macro scenario unfolds as expected, with energy prices falling and the gold price climbing, these are worthwhile entry points. It's currently a countercyclical investment, with these stocks experiencing a major downturn since March and now being largely shunned by investors.
- Despite the recent slump in gold's price due to the shift in interest rates and influx of funds into other investments, Mark Valek argues that gold investing remains crucial during times of high inflation and uncertain economic conditions.
- In the long run, according to Valek, gold's role as a safe haven and store of value could potentially lead to a significant increase in its price, as demonstrated by his prediction of gold reaching $4,800 by 2030.
