GDP is weak, recession is imminent, TD Securities: Gold prices target $2,100
Analysts at TD Securities said that the looming economic recession, the Federal Reserve’s slow response and the rapid interest rate cutting cycle will combine to push gold prices to a record high in the first half of 2024.
“We expect gold prices to rise to $2,100 an ounce on average quarterly,” Ghali, an analyst at TD Securities, said in a recent interview with Moneytalk. “From a more tactical perspective, this could be significantly higher than expected. In fact, What we see here is a significant underestimation of all macroeconomic scenarios except a soft landing. In fact, we expect the U.S. to slip into recession in the first half of next year, we are starting to see cracks in the data, and investors are betting on the gold market The position on the market is seriously insufficient.” FedRaiseInterestRateStorm #
That’s especially noteworthy given the unusually high correlation between stocks and bonds, which means traditional portfolio diversification tools are no longer effective, he said. “Commodities are one angle you can look at to address this.”
Ghali believes that recent data showing a strong U.S. economy is misleading and masks considerable weakness, and the Fed will have to cut interest rates more deeply and faster than the market expects. “The third quarter GDP report was excellent,” he said. “Intuitively, market participants have seen the growth trend that has emerged over the past few quarters and started to predict this trend, but the reality is that the quality of the GDP report is actually quite poor. .”
Ghali said TD Securities expects “the growth outlook to deteriorate significantly” starting in the fourth quarter of 2023 and continuing into the first half of next year. “We think the market has become comfortable with the idea of the Fed providing insurance rate cuts, but as the economy The outlook for recession must also be further confirmed,” he said. “The Fed will cut interest rates far more than the market currently expects.”
He also said that if the Fed bases its decisions on real rates rather than nominal rates, then “longer higher” would actually amount to additional large rate hikes, even if economic growth worsens. “
“That’s the part that people have a hard time understanding,” Ghali said. “Powell has conveyed the idea that the FOMC is actually comfortable with the idea of actually watching the federal funds rate. If the Fed actually just keeps nominal rates on hold and inflation declines in the first half of next year, then real expectations are actually The federal funds rate will rise significantly. This is essentially the Fed tightening policy significantly during this period, which is unnecessary when economic growth has deteriorated and inflation is actually moving closer to target every month. “
“If a recession does occur, as we expect, we think the market will endure a more aggressive cycle of rate cuts.” He added that because central banks such as the Federal Reserve are forward-looking when it comes to data, they are bound to be late to respond to the worsening recession. growth prospects. “Central bankers tend to look at the data as it comes in, so essentially they’re going to be behind the curve in terms of their growth prospects and they need to see actual weakness in the data before they cut rates,” he said. “The result is, What we will see between these moments is that the economic deterioration will accelerate, which may require more aggressive cuts.”
Ghali predicts that TD expects gold prices to begin setting a series of new all-time highs at this time. He also said that even before an impending breakout, gold’s current strength suggests that central bank buying has led to structural changes in the market.
“The interesting thing about the gold market is that the rise in interest rates that we see tends to be quite negative for gold prices, but if you zoom out, gold prices today are still hovering around all-time highs,” he said. “The deterioration of this relationship is actually “Suggesting that central bank demand is very large, this demand distorts the relationship because primarily investors tend to focus on interest rates, and interest rates filter through to capital flows into gold.”
“Central banks tend not to see it that way,” Ghali said. “We believe this is a structural trend driven by a shift in thinking in countries in the Global South, with central banks around the world from China to the Middle East to Turkey looking to add gold to their foreign exchange reserves. in reserves.” “If central bank demand remains as strong as ever, or is generally strong, and investor demand kicks in due to the outlook for lower interest rates, then the outlook for gold tends to be quite positive.”