EDITOR'S NOTE: Plenty of analysts are somewhat in consensus that gold will reach upwards of $4,000 an ounce. But what’s going to drive gold to a price that’s equivalent to over a 100% return from today’s gold prices? According to economist David Rosenberg, there are plenty of fundamental factors in play that will likely lift both gold and bonds—classic safe-haven assets—to extraordinary levels. Think of a peaking dollar, monetary policy, and a very harsh recession. If you’re not quite getting the picture, read the article to get his specific take on the dilemma that’s presenting this rare “golden” opportunity.
Investment demand for gold should push prices to all time-highs above $2,000 in 2023 as the U.S. economy falls into a recession, according to David Rosenberg, founder and chief economist at Rosenberg Research.
In an exclusive interview with Kitco News, Rosenberg said that when it comes to the health of the economy, the only questions investors should be asking themselves this year are: how bad will the impending recession be and how should they be protecting their wealth?
Rosenberg's pessimistic outlook comes as the S&P 500 has rallied nearly 4% since the start of the new year. Sentiment on Wall Street has improved as positive employment data and falling inflation are reviving hopes that the U.S. economy will see a soft landing.
"I see this outlook as a hope and a prayer," he said. "A recession is as close to a sure thing as anything can ever be."
Although inflation has dropped sharply from its 2022 summer highs, it remains persistently high. Rosenberg said that the Federal Reserve's fixation on bringing inflation back down its 2% target means it will be slow to react to growing economic weakness. He added that the Fed won't be quick to cut interest rates because it doesn't want to see a renewed threat of inflation.
"What happens in a recession is they ultimately end," he said. "The mild and brief affairs we've seen in the past were predicated on the Fed cutting rates early and aggressively. But there's not going to be a get-at-out-of-jail-free card this time around. I'm more concerned about a more severe downturn, and if it's not more severe in terms of magnitude, then certainly in terms of duration."
In this environment, Rosenberg said he sees the Federal Reserve raising interest rates one more time next month and then holding until the recessionary conditions become too difficult to ignore.
As for markets pricing in a fed funds rate above 5%, Rosenberg said that investors need to take central bank projections with a significant grain of salt.
"This is the same Fed that saw interest rates at the start of last year, ending the year at 0.9%. So what do they do for an encore?" he asked.
He added that he sees the Federal Reserve cutting interest rates by the second half of the year, which is why he is bullish on gold.
"Gold will be making all-time highs in U.S. dollar terms this year. And let's not forget what a phenomenal year gold had in 2022 as it hit practically new highs in every other currency," he said. "Last year, the U.S. dollar overshot its fundamentals, and we are going to see that revert back to the mean, and that will be positive for gold."
As to how bad the recession will be this year, Rosenberg said that it could last more than six quarters, the longest recession since the 1980s.
Sorry, folks. No soft landing. On track for 3 straight quarters of declines in real retail sales alongside 2 successive negative production numbers. Only happens in recessions.
— David Rosenberg (@EconguyRosie) January 18, 2023
Rosenberg used the U.S. housing market as just one example of the impending economic rest. He noted that the housing price bubble is bigger than before the 2008 financial crisis.
"Everyone is so consumed with consumer inflation that they have taken their eye off the ball over asset deflation at a time when going into this cycle we are naked long $90 trillion or four-times the U.S. economy, in residential real estate evaluations. We have never seen this before," he said. "The equity market and the housing market are the longest-duration segments of the economy, and They're the most sensitive to interest rates. 2022 was the year of the rate hikes and the impact that had on the market multiple. And 2023 will be the year when those Fed rate hikes percolate to the real economy."
Not only is Rosenberg not expecting the Federal Reserve to provide much relief during the impending recession, but he added that consumers shouldn't expect to see any fiscal stimulus from the U.S. government. He noted that the Republican Party, with control over the U.S. House of Representatives, is focused on implementing austerity measures to rein in government spending.
Originally published by Neils Christensen at Kitco