The Potent Mix That Could Send Gold to $4,500

Could FOMO — the Fear of Missing Out — take hold of the gold market, and ignite a race to the safe haven commodity, propelling its price towards $4,500 an oz? A recent report from Bloomberg Intelligence hints at this possibility, backed by the impending slowdown in the global economy in the second half of the year.

As we look at the data, one thing becomes clear: the landscape for gold in the latter half of this year is shaping up to be vastly different from what we've witnessed so far. Central banks have been making significant gold purchases over the past several months, suggesting a foundational shift towards tangible assets amidst economic uncertainties.

With the first half of the year wrapping up this Friday, the stock market may well face its reckoning in the latter half. High-performing equities, fuelled by the Federal Reserve's hawkish stance, may not sustain in the face of an economic slowdown. We've seen U.S. Treasuries yield around 5% and the S&P 500 climb about 15% in 2023, but, as Bloomberg Intelligence senior macro strategist Mike McGlone rightly questions, can this performance last?

Echoing the concerns of 1929-30, when the initial fall in the Dow Jones Industrial Average was followed by a sizeable bounce before the onset of the Great Depression, McGlone's analysis points to the significant risk of a similar fate, due to the massive liquidity pump now receding.

Historically, the gold market has benefitted from economic slowdowns and stock market selloffs, making it a reliable refuge for investors. This year, the central banks' accumulation of gold has provided considerable support to its prices, offsetting gold ETF outflows. Once the stock market hits the skids, there will be little standing in the way of a gold surge.

Divergence is another crucial factor here. McGlone indicates that the 10% year-over-year drop in Gold ETF holdings compared to a similar rise in gold price may be a sign of its unique strength. Central banks, some of the world's deepest pockets, are buying gold, hinting at a potential Federal Reserve pivot.

Adding fuel to this golden fire is the prospect of a deflationary recession, a possibility that might take the wind out of the stock market's sails. But for gold bulls, this could be the golden ticket to prices holding steady above $4,500 an oz.

Gold’s current price per ounce, roughly half of the S&P 500's level in Q2 (when priced in USD), could transform into a significant advantage, especially if the U.S. economy contracts. History has taught us how booms often bust when excessive liquidity is withdrawn. These circumstances may set the stage for gold to rise above and stay past its US$3,000 ($4,500 Aussie) resistance point.

As we conclude the first half of the year and brace ourselves for the evolving global economic conditions, gold is showing all the signs of becoming the go-to haven for investors. A projected economic slowdown, high valuations in the stock market, an aggressive buying spree by central banks, and FOMO could all combine to create an unprecedented scramble for gold.

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