As the Federal Reserve maintains its hawkish bias, pushing the economy closer to a recession, the perfect storm is building in the gold market. Gold’s value compared to equities and bonds makes it an ideal portfolio diversifier under these conditions.
Risks Supporting Gold Prices
Tavi Costa, portfolio manager at Crescat Capital, cites three risks for the global economy that will support gold prices. These include a U. S. debt default (though highly unlikely), a recession caused by the Federal Reserve’s tightening, and U.S. debt levels leading to a bond market selloff. Costa’s research on the yield curve reveals that 90% of the curve is inverted, a historical signal to buy gold and sell the S&P 500.
Foreign Buyers and Central Banks
As the number of foreign buyers of U. S. debt reaches its lowest in 19 years, central banks have shown strong gold demand, fundamentally transforming the precious metals market. As interest rates rise globally, volatility in foreign exchange markets is expected, leading central banks to enhance their reserves by owning more precious metals.
Undervaluation and Portfolio Diversification
Costa highlights the fact that gold is still significantly undervalued compared to the rest of the market, despite being only 6% down from record highs above $2,000 an ounce. As uncertainty and risks grow, he advises investors to balance their portfolios by holding 30% in equities, 20% in fixed income, 30% in gold, and 20% in a broad commodity basket.