Gold has performed better than the stock market so far in 2022 due to the elevated danger of imminent stagflation that has arisen as a direct result of the war between Russia and Ukraine.
The inflation rate has been rising steadily in the United States, and now it has reached a particularly problematic level in the Euro Area as a direct consequence of the increasing prices of energy in that area as a direct result of its dependence on imports from imports Russia.
Goldman Sachs cites increased investor demand for inflation-hedged assets and strong spending in Asia as reasons for raising their forecast price for gold to $2,500 over the next six months. Goldman Sachs brought up this concept of a “perfect storm” for the gold rally.
If we look closely at the connection between gold and US interest rates, we can see that an inverse link between gold and real yields has been re-established in recent weeks. As a result, an increase in market expectations of Fed rate rises may drag gold’s climb.
In this scenario, one of the most significant factors will be whether or not the Federal Reserve follows Jerome Powell’s recent recommendation to raise interest rates gradually or if it meets the market’s expectations.
In the meanwhile, the slope of the US Treasury curve has never been flatter since March 2020, which indicates that market participants are becoming more concerned about a slowdown in economic growth. An inversion of the US yield curve has always come before every single recession in the United States during the last 50 years.
The Price of Gold Mining
According to Marrone, his firm, Yamana Gold, is reasonably protected from the most recent economic headwinds, including increased fuel prices and geopolitical problems.
According to what he indicated, “we are not extremely dependant on diesel,” as it represents just 5-6 percent of our entire expenditures. Because of this, even if we see some inflationary pressure on specific inputs, we are increasing our output, implying that our total production costs are decreasing on an ounce-for-ounce basis.
Regarding the war between Russia and Ukraine, Marrone made the following remark: “We’re not experiencing any obstacles. Neither a supply nor an acquisition originates from that region of the earth. Therefore, our business in the Americas is not particularly susceptible to outside influences.
A Recurrence of the Past?
Marrone pointed out that the year 1980 was a terrible one for stagflation, and the year 2022 had several similarities. He said that the past might serve as a reference for determining the future price of gold. According to his explanation, “[in 1980], we were amid an inflationary phase while simultaneously being in a recessionary time.” “At that time, we found ourselves amid war, the Russian invasion of Afghanistan. The United States of America referred to Russia as “the wicked empire.” Therefore, many of the events occurring around the globe now are comparable to those that took place back then.
Marrone went on to imply that current developments, such as soaring inflation, an impending recession, and conflict in Ukraine, are analogous to what took place in 1980.
According to what he said, “in the backdrop of [what was occurring in 1980], the price of gold went up to around $840 per ounce.” What does $840 imply in today’s currency after adjusting for inflation? This value is somewhere in the range of $2,700 and $2,800. Furthermore, I believe there is an outstanding possibility for the price of gold to rise to levels comparable to those seen in the past.
Recently, the Federal Reserve increased the interest rates by a total of 75 basis points. However, according to Marrone, this is not enough to halt inflation, and he hinted that the Federal Reserve might back off of its hawkish initiatives.
He explained that “there are minimal things that central banks can do as a consequence of what’s creating this inflationary pressure, which is interruptions in the supply chain.” “… The total amount of debt in the world has reached new heights… And economies all across the globe are contracting. It appears that we are now in this ideal storm, in which it will be extremely difficult for central banks, including the Fed, to raise interest rates to a level that would bring inflation under control. At some point, they will most likely be required to scale down their efforts or realize that inflationary pressures are likely to remain for a more extended period than was first expected.