“One must make several assumptions about the war in Ukraine. We don’t think that it will be completely resolved during 2022 and the current prices of precious metals will be very different vs. our original forecasts from earlier this year,” says Nicky Shiels.
The big change from the outlook is due to the increased risks of recession, especially because of the upcoming Fed Reserve’s rate increases and slower economic growth than expected.
“The upcoming rate hikes by the Fed aimed at countering the high inflation bring forward a higher risk of recession much faster than the markets believed previously. The view from certain Central Banks of putting inflation worries ahead of war concerns is troubling, as is the threat of added sanctions from the West on Russia or nations like China for giving Russia any support,” Shiels wrote.
The United States is also facing a high risk of a double-digit inflation after the Feb. CPI reached 7.9%.
“We first believed a stagflation-like backdrop would help support Gold. That backdrop is speeding up with a growing risk of a having hyperinflation depression within Russia and a recession for Europe. The structural and the ongoing regime changes – from globalism transitioning to isolationism and the associated trade policies thereof – is inflationary and made worse by this war,” Shiels says. “There is also a trend of concern that the global payments system and wealth have recently been politicized and weaponized.”
This is why MKS is now expecting gold to avg. $2,000 an ounce in 2022, with an upside risk of about $2,500.
Supporting drivers for gold has raised demand as traders look for hedges against the geopolitical uncertainty, recession risks and inflation.
One potential headwind that should be monitored closely is the central bank of Russia turning to gold-selling to help it avoid Western sanctions.
“But that should really be weighed against the upside risks of the non-Western central banks increasing Gold holdings with the inflationary outcomes of this war & the risks of their US dollar holdings being sanctioned by the West at any time,” Shiels explained.
MKS also updated the outlook of silver price to $25 from its initial forecast of $22, citing some benefits from gold’s value appreciation, but noting a slightly weaker industrial demand.