Gold struggles around the $4,800 mark; strategist: Looking at a longer time frame, gold will start to strengthen.

According to Xinhua News Agency, on the evening of the 7th Eastern Time, U.S. President Trump posted on social media: “I agree to suspend bombing and attacks on Iran for two weeks.” Iranian Foreign Minister Zarif issued a statement on the 8th, announcing that the Strait of Hormuz will be safe for navigation within two weeks.

Affected by this news, Brent crude oil prices once fell more than 13% to $94.66 per barrel, WTI crude oil plummeted over 15% to $95.92. The Asia-Pacific stock markets collectively strengthened, with the three major U.S. stock index futures rising by over 2%. In precious metals, gold continued its upward trend, once surpassing the $4,800 mark, rising over 3% intraday, breaking through the important $4,850 per ounce threshold, but as of the time of this report by First Financial, spot gold prices retreated to around $4,781 per ounce, up 1.6%.

In the temporary easing of Middle East tensions, can trading in gold and other precious metals be effectively restored?

Peter Berezin, Chief Global Investment Strategist at global consulting firm BCA Research, told First Financial reporters at a seminar that, “In the past few weeks, under the impact of ‘risk-off’ sentiment, rising interest rates and a strengthening dollar have temporarily deprived gold of ideal macro support. But he emphasized: ‘From a longer time horizon, I believe gold will start to strengthen.’”

Gold or Bonds?

At the end of last year, the value of global central banks’ gold reserves exceeded that of U.S. government bonds for the first time since 1996.

Aaron Brown, former Head of Financial Market Research at AQR Capital Management, believes this marks a structural shift in how sovereign institutions allocate reserves. He argues that the current surge in gold prices is fundamentally different from the past, which was mainly driven by retail speculation and inflation fears, whereas now it is a long-term strategy of sovereign institutions. This is no longer the traditional “hedge against inflation,” but a form of “geopolitical insurance.”

“Gold performs best not when inflation is at its highest, but when trust in monetary institutions is at its lowest,” Brown said. When global central banks review their assets and conclude that “they prefer assets that governments cannot confiscate,” gold becomes unstoppable.

Berezin shares a similar view, believing that the current trend of reserve diversification will continue, “In the face of limited options for other fiat currencies, central banks hope to reduce dollar holdings by increasing gold reserves. This is a long-term theme, and I think gold will perform well.”

However, Berezin does not dismiss bonds entirely. He believes that despite current inflation pressures, global economic growth is expected to disappoint in the second half of the year, and the Federal Reserve will have to “pinch its nose” and cut interest rates. The environment of rate cuts will directly lower bond yields, benefiting the bond market.

He told First Financial, “If we see a significant rise in long-term inflation expectations, that would favor gold, and I would also delay increasing bond allocations. But for now, we haven’t seen that situation.”

Berezin explained, “If you look at the five-year, five-year-forward inflation expectations, whether through CPI swaps, TIPS, or breakeven inflation rates, these indicators are actually declining and at the bottom of historical ranges. That is, investors currently expect inflation to rise first and then fall. If this expectation is challenged, meaning investors start to expect prices to continue rising and inflation to become long-term, then I think the environment will become more favorable for gold and less so for bonds.”

Negative Wealth Effect Weighs on U.S. Economic Outlook?

This “inflation rising then falling” expectation implicitly prices in downside risks to the economy. Currently, U.S. economic growth relies more on consumption by the wealthy, supported by the “wealth effect” from the stock market.

Moody’s Chief Analyst Mark Zandi said that the top 10% of American households account for nearly half of consumption, compared to one-third thirty years ago. The S&P 500 has doubled since the end of 2019. The New Economy Think Tank estimates that from 2020 to 2023, the gains in stock market wealth of the top 10% explain the portion of U.S. consumer spending above long-term trends.

However, this highly concentrated consumption structure faces challenges. Berezin warned that if tech stocks crash, it could replay the 2001 recession scenario. Currently, spending on hardware and software accounts for a high proportion of U.S. GDP, and a decline in stock prices could lead to a sharp contraction in spending, with serious consequences. “It might not happen this year, but it’s very likely next year,” he said. This year, a “negative wealth effect” caused by falling stock prices could occur.

Berezin said that at the beginning of this year, U.S. households held about $70 trillion in stock wealth, nearly 100 percentage points higher than the 2000 bubble peak relative to GDP. According to the rule of thumb, every $1 change in stock wealth affects consumption by about 4 cents. This means a 20% decline in the stock market could reduce consumption by nearly 2%, enough to push the U.S. economy into recession.

“Unfortunately, the economy hasn’t started strongly this year. Besides turbulence in the tech sector, oil price shocks also have an impact. Looking at the U.S. labor market, you’ll find that apart from healthcare, almost no employment growth, and some sectors are even shrinking. This is not only due to slowing labor supply growth but also weak labor demand. The labor supply-demand gap has been narrowing,” he said.**

Compared to the U.S. economy in 2022-2023, Berezin believes that the “buffer” for American households to cope with risks has essentially disappeared. Excess savings accumulated during the pandemic are exhausted, and bank deposits have fallen back to 2019 levels. With rising default rates on credit cards, auto loans, and student loans, under the triple pressures of oil prices, interest rates, and unemployment risks, “U.S. consumers are not in good shape.”

(This article is from First Financial)