Gold's Countdown to a Crucial Turn

Equity markets in the U.S. and around the world remain overvalued and geopolitical risks continue to intensify, making it a good time for investors to increase their allocation to gold, according to JPMorgan Chief Market Strategist Marko Kolanovic.

In the investment bank’s latest Global Markets Strategy report, Kolanovic noted that while markets are off their early October lows, the medium-term outlook remains negative with headwinds getting stronger and tailwinds weaker.

“Still-rich equity valuations face increasing risk from high real rates and cost of capital, while earnings expectations for next year appear overly optimistic,” he wrote. “Weakening PMI momentum suggests that Q3 earnings growth is likely to be negative, while softening corporate pricing could lead to a squeeze on margins.”

Kolanovic said he believes that most of the negative effects from high rates are still to come. “Delinquencies in consumer loans and corporate bankruptcies are starting to move higher, and this trend is likely to continue absent a cut in rates,” he wrote. “The flare up of geopolitical risks adds another headwind and increases tail risks for markets and economic activity. Our outlook is likely to remain cautious as long as interest rates remain deeply restrictive, valuations expensive, and the overhang of geopolitical risks persists.”

Given the litany of headwinds and risks, Kolanovic said JPMorgan is maintaining “a defensive allocation in our model portfolio, with an UW in equities and credit vs. OW in cash and commodities.”

The bank reversed last month’s cut to their model portfolio’s duration exposure, and is putting more into bonds and commodities, and gold in particular. “While it remains uncertain whether bonds have bottomed, we add back 1% to our government bond allocation given geopolitical risk, cheap valuations, and less pronounced positioning,” he said. “We additionally increase our allocation within commodities to gold, both as a geopolitical hedge, and given an expected retracement in real bond yields.”

JPMorgan wrote in the report that they project spot gold prices to average around $1,920 per ounce in Q4 2023. Their quarter-by-quarter projections for 2024 are $1,950 in Q1, $2,030 in Q2, $2,100 in Q3, and $2,175 by Q4.

Gold prices are showing continued strength on Wednesday. After hitting a high of $1,962.67 shortly before 10 am EDT, spot gold retraced somewhat, and last traded at $1,953.39, up 1.57% on the day.

Originally published by Ernest Hoffman at Kitco