XTB bets on gold after hitting highs and facing the risk of stagflation By Investing.com


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Investing.com – In times of heightened uncertainty and inflationary pressures, the has historically been a safe haven as FIAT (MI:) currency tends to depreciate. And in a context like the current one, where inflation is at 40-year highs, bordering on 2 digits, gold will emerge stronger again in an environment with a high risk of stagflation, according to a report prepared by the XTB broker.

“The investor tends to take refuge in gold when he perceives financial instability derived from the economic slowdown, but especially when real interest rates are negative, that is, when the level of inflation is higher than the level of official interest rates. Today, the real interest rate in both the US and Europe is at a century low. And the reluctance of the Central Banks to quickly withdraw monetary stimuli, despite inflationary pressures, makes it likely that this situation will last at least during the first part of this year”, explains Pablo Gil, chief strategist at XTB.

In this regard, and taking into account the key factors that will determine this exercise, XTB lists several points to pay special attention to. On the one hand, there is a consensus among the main international organizations, such as the IMF, the World Bank, the Fed and the ECB, that the world economy will suffer a much greater slowdown than expected at the end of 2021. On the other hand , inflationary pressures, which were initially analyzed in a transitory context while the logistical problems stemming from the pandemic were resolved, have now spread across the board to all segments of the economy. In the case of the US and the UK, they are beginning to affect wage pressures. In addition, the war in Ukraine has further complicated the situation, since Russia is one of the largest exporters of oil and gas in the world, and on the other hand, Ukraine plays a very important role as a source of supply of grain and industrial metals at the global level. global.

And all this situation will also affect the keys that will determine the future behavior of gold, since they will be linked to the triangle made up of economic growth, inflation and the level of interest rates.

In this sense, one of the possible scenarios is that the economic slowdown ends up causing a recession, in which case inflation will subside due to the collapse in consumption. In this scenario, the interest rates that will have risen throughout 2022 will return to the point of origin, that is, to historical lows within one or two years.

“But the investor must understand that there is a lag between these adjustments: first the economic collapse occurs, then inflation reverses and lastly interest rates are adjusted. If this scenario occurs, the phase of economic collapse will allow advances in gold, given the increase in uncertainty and the increase in risk aversion. But we will have to take advantage of that window to get out of the metal, because the drop in inflationary pressures will follow”, explains Pablo Gil.

Another possible scenario is that central banks are not too aggressive in their fight against inflation to prevent the economic slowdown from ending in a new recession. “In that case, it is most likely that inflation will tend to stabilize at levels above that 2% that the Central Banks seek as a strategic balance point, which would put a floor on the price of gold in the medium term,” affirms the chief strategist at XTB.

Finally, the worst possible scenario for gold is that inflation subsides rapidly and geopolitical tensions give way to an environment of less tension and uncertainty. In this regard, Pablo Gil assures: “The end of the war could meet part of those requirements, but taking into account the atrocities of the Russian army in Ukraine and the potential reprisals against Putin, it does not seem likely that commercial relations with Russia will be reestablished. one of the main exporters of energy in the world, nor that Ukraine can be counted on in the short/medium term to restore the rate of supply of raw materials that it had before the war”.

And he continues: “Meanwhile, China continues to wage its particular war against COVID and has been forced to completely confine the city of Shanghai, with 26 million inhabitants, which reminds us that, although for most developed economies The pandemic is no longer a source of concern at the economic level, for the world’s second largest economic power it still represents a significant challenge, which could lengthen the logistical problems in international trade and with it the longer-term inflationary pressures ” .

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