(Kitco News) Could the year-end scenario be gold at $2,500 and crude oil at $50? Gold is one of the assets that could benefit the most this year, while oil still faces crippling demand prospects going forward, according to Bloomberg Intelligence.
“Markets could face a long period of risk-free reversion, which we see as key to reducing inflationary pressures. Gold should be the main beneficiary, potentially along with long US Treasuries and Bitcoin,” he said. Mike McGlone, senior commodities strategist at Bloomberg Intelligence. . “Gold is about to cross the $2,000 rubicon…Potential endgame for 2022 – $50 crude, $2,500 gold, recession.”
Gold has been trading in a narrowing wedge pattern, and these have a habit of breaking out on the upside, McGlone pointed out.
“The 2021 range of around $1,700 to $1,950 an ounce roughly matches the 50-week Bollinger bands, which are the narrowest since 2018. around $1,200 about four years ago and a subsequent break above $1,400 in 2019 when the Fed started to ease again. Around $1,800 is a strengthening base for a potential break through resistance $2,000,” he explained.
High inflation, surging commodities, risk aversion sentiment in US equities are all adding to gold’s situation right now.
“We see the metal as one of the major potential late-game players in 2022, especially when commodities priced to supply shocks succumb to the inevitable destruction of demand,” McGlone said. We see gold gaining demand as a store of value, along with Bitcoin, from portfolio managers looking for alternatives for recessionary risks and late equity reversion.”
Gold’s sticky resistance level of $2,000 an ounce will likely become its “sustainable support” level, the senior commodity strategist said. This would be a major move for the precious metal, which has seen this level as strong resistance for the past two years.
“We believe gold is more likely to prevail longer term as a key headwind may return – the seemingly unstoppable appreciation of the US stock market,” McGlone said. “The S&P 500 may be beginning a mean reversion process similar to that of 2008, but from a much broader state. In 2007, the stock index peaked about 24% above its 200-week moving average. The November high was about 45% above that average.”
However, the picture looks dramatically different for the current crude oil price spike, with Bloomberg Intelligence not ruling out a sell-off at $50.
“This year could end like 2008 and refresh a sustained bull market for gold versus a bear market for crude oil. What is different from 14 years ago is that the war in Ukraine will accelerate the process of replacing technology with fossil fuels and expanding the stock market is facing restraint from the Federal Reserve. The recession is one of the main ingredients in the fight against inflation,” McGlone added. .
High crude oil prices in 2022 could be highs set in decades due to crippling demand going forward, the note said.
“That’s hardly surprising, as it’s the typical result of crude price spikes – the all-time high in 2008 near $145 a barrel as the most recent example. West Texas Intermediate’s future record of $130.50 on March 7 was roughly equivalent to the 1990 Gulf War and 2008 highs when measured against the 60-month average,” McGlone described. “Crude oil is more at risk of doing what he has after high speed spikes – coming back lower. Ley retracement levels to look for – around $59 (the 60 month average) and $32 (the average cost of production in the US). Around $30 would be the typical 80% correction since 2008.”
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