(Kitco News) – The gold market has seen one of the quietest bull rallies on record as prices rally from all-time highs to all-time highs, but investors should no longer ignore the precious metal, according to one famed economist and market analyst.
In a report published last week, David Rosenberg, founder of Rosenberg Research, said that even at these lofty prices, gold still has plenty of upside potential, and now is the time to be overweight the asset.
“Any well-diversified portfolio should contain gold, and, at present, we’d recommend an aggressive overweight. That will act as a hedge against geopolitical and fiscal risks, offer a safe harbor against a breakdown in the equity bull-run, and give positive exposure to the coming easing cycle and period of dollar weakness. Don’t be afraid to go in at current levels,” Rosenberg said in the report.
In the current environment, Rosenberg said that his baseline scenario is for gold to hit $2,500 an ounce. He added that any number of catalysts could even push prices to $3,000 an ounce.
The bullish outlook comes as gold prices hold support above $2,350 an ounce.
Rosenberg noted that gold is not only outpacing the S&P 500 but its gains have been made in a traditionally difficult environment.
“The rise in the gold price has come at a time of dollar strength, falling inflation expectations, and during which the Fed has moved market expectations toward a “higher for longer” conviction. All those developments would typically hurt the gold price, but it’s forged ahead regardless,” he said.
However, he added that the broader gold market is focused on more than U.S. macroeconomic conditions. Rosenberg noted that gold has seen significant gains against all major global currencies.
Rosenberg said that the biggest factor supporting gold prices remains active central bank buying as nations diversify away from an overreliance on the U.S. dollar. China’s central bank has been the dominant gold buyer in the last two years and has bought gold for 17 months straight.
At the same time, emerging markets are seeing robust physical demand from retail investors looking to protect their wealth and purchasing power.
Finally, Rosenberg noted that gold continues to benefit as a safe-haven asset as economic risks and geopolitical uncertainty dominate global financial markets.
Although gold has largely ignored the threat of the Federal Reserve holding interest rates in restrictive territory longer than expected, Rosenberg said that he expects to see traditional correlations emerge when the Federal Reserve does start cutting interest rates.
Rosenberg’s team developed a comprehensive model of the gold market. In the first scenario, where the U.S. economy avoids a recession, Rosenberg sees gold prices rallying 10% as the central bank starts to cut interest rates. This model puts interest rates above post-2008 financial crisis levels.
At the same time, if a recession does hit, which would push interest rates back down averages seen in the last ten years, Rosenberg sees gold prices rallying 15%.
“Of course, these scenarios don’t include a few key factors that could push gold prices even higher. Any further deterioration in the global geopolitical situation would be positive for gold. Deteriorations in financial conditions, in addition to the impact of interest rates (such as higher spreads driven by rising corporate defaults) would spur on gold, too. Finally, repeated and increasingly dire warnings over the fragile state of the U.S. fiscal position can only support bullion buyers,” he said in the report.
“Putting those observations together with our modeling exercise tells us that downside risk to the gold price is limited, but there is a lot more room to rise,” he said.
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