Gold At $4000 Is Still Possible Despite Strong Macro Statistics

Gold prices are still firm, despite easing geopolitical tensions and inflation numbers exceeding the Fed’s 2% target. The Fed’s preferred inflation index, the core personal consumption expenditures

(PCE) index (which excludes food and energy), totaled 2.8% in April. The statistics were released on May 31. The US unemployment rate has also been staying low; the number reported for April totaled 3.3%. It might seem like the Fed has no reason to ease its monetary policies. But despite the rather poor news for the gold market, gold is still trading above $2300. But more is yet to come. Citigroup (C) expects one ounce of gold to reach a price of $3000. However, in my opinion, gold should be worth even more than that, and more bullish news is yet to come.

$4000 gold—previous article recap

In my earlier article on gold, I wrote about the precious metal’s undervaluation and its potential to appreciate much further, possibly reaching $4000 per ounce.

I also emphasized that, despite the high-interest rates, the precious metal’s price has been resilient. Historically, gold has always reacted to lower interest rates and quantitative easing (QE). I also noticed that geopolitical risks and unexpected crises could be strong growth factors for gold.

As I am writing this, the macroeconomic statistics suggest the US economy is far too strong right now. In many investors’ view, the geopolitical tensions have eased. Since autumn 2023, the world has been paying close attention to Israel’s war against Hamas. There are hopes that Israel will agree to a temporary ceasefire deal. However, this hope might be in vain. Despite the strong macro-statistics, especially the low unemployment rate, I am still bullish on gold. So, my highly bullish position remains unchanged.

Economic data

The core PCE index increased 2.8% compared to the same period a year ago. There was no change from March, and the April number was in line with expectations. On a monthly basis, this indicator rose by 0.2%, as expected. The personal consumption expenditures price index, meanwhile, totaled 2.7%, also quite in line with the previous months.

Consumers showed that they are still spending despite the elevated price levels. The personal income statistics also show some resilience.

This also suggests that consumer optimism is high. At the same time, this means that consumers do not have too much cash left to save, which was not the case in 2020 and 2021, when Americans got a lot of government money. This was all part of COVID relief spending to support consumption. However, this suggests that inflation is still above the Fed’s 2% target, while personal incomes and spending are strong.

The US labor market is also quite strong. The April 2024 unemployment rate is currently at 3.3%, roughly in line with the previous statistics.

The recent unemployment statistics are also close to the levels seen in 2019 before the pandemic when the employment market was particularly strong.

Overall, we can say that the economy is not slowing down, whilst inflation numbers are above the 2% Fed’s target. That is why some analysts and market experts say fewer rate cuts are to be expected this year.

What will happen if the Fed does not ease?

But the key question is: what will happen to the US economy if the Fed does not ease its monetary policies fast enough? There are different opinions on the subject. Generally, higher rates over a long period of time risk provoking a recession. But some experts say the US economy can withstand higher rates for longer. Among them is David Kelly, chief global strategist at J.P. Morgan Asset Management. Since the US economy is strong, consumer spending and inflation numbers are high, and the unemployment rate is quite low, higher rates for longer may be appropriate for the economy as long as they do not stay high for too long. Higher rates might slightly cool down the economy and allow the Fed to reach its inflation target. So, if this scenario turns out to be true, there will be a “soft landing” for the US economy.

At the same time, it is easy to go too far with higher rates for longer because tighter monetary conditions would eventually make the economy enter a recession. What would happen to gold in this case? Well, all asset classes plunge in value apart from the US dollar when the market starts panicking, but then take off as the Fed eases monetary conditions and investors start buying various asset classes. This is also true of gold.

Here is how gold behaves during recessions. The graph below shows gold prices’ 100-year history; recessions are shaded in gray areas.

Gold price history

The most obvious case of gold correcting and then surging to new all-time highs was in 2008, when the…