Tales of Tail Risks: Explaining VanEck’s $2,075 Gold Target

There’s a touch of optimism permeating the equity markets as of late. The Federal Reserve recently halted its streak of rate hikes, having notched up 10 back-to-back increases in 15 months. Additionally, in May 2023, U.S. inflation dipped to 4%, and the S&P emerged from its longest bear market since 1948.

Yet despite these ostensibly positive signs, a cloud of concern persists. Usually, when there's a revival of bullish sentiment, talk of gold surpassing its all-time highs would seem far-fetched. But we live in unusual times. The type of unusual times where on the same day the Dow notches its third week of consecutive gains, the S&P 500 its fifth, and the Nasdaq its eighth, VanEck projects gold to touch a record-high price of $2,075.

Seemingly, this defies logic. However, a closer examination of VanEck's report unveils a less puzzling picture. Why? VanEck contends that the current "tail risks" - extreme events that could trigger severe impact - are at least as potent today, if not more so, than those during past bull markets.

The Case for Gold Reaching $2,075: A Comprehensive Look at VanEck's Reasoning

Gold has been riding a bull market for quite some time now, with its value surging by a robust 87% from its December 2015 lows. The road, however, could have been smoother. Fluctuations in price, with dramatic rises, falls, and periods of stagnation, have made accurate forecasts challenging.  

Yet, as we move into the latter half of 2023, VanEck's $2,075 gold price target is rooted in enduring realities. Factors that traditionally stimulate gold's bull runs - periods of turmoil, conflicts, societal upheaval, and financial instabilities - appear as acute today. VanEck further suggests that these ongoing uncertainties could further impact gold's trajectory when coupled with a declining dollar.

Inevitability of More Risk Events

Future geopolitical and financial upheavals provide strong reasoning for gold prices to again test and possibly surpass their historic highs. First are escalating geopolitical tensions. Russia recently placed nuclear bombs in Belarus, ramping up already high tensions in Ukraine. China also allegedly paid Cuba billions to build a spy facility.  

Financial risks arising from interest rates also warrant attention. Despite the Fed's temporary halt on rate hikes, further increases loom, suggesting extended periods of high rates and monetary uncertainty. Moreover, VanEck notes vulnerabilities in the UK's pension system and US mid-tier banks, amplifying global economic uncertainties.

The De-Dollarization Effect  

Another key argument is the changing relationship between the U.S. dollar and gold. While the strengthening dollar has dampened gold price surges recently, many believe its impact will likely decrease. One reason why is the Federal Reserve is closer to the end of its rate hiking cycle than the beginning. Another contributing factor is the increasing trend of "de-dollarization." With de-dollarization, emerging markets, such as Russia, India, and China, distance themselves from the U.S. dollar. They achieve this by boosting their gold reserves and using them to back and strengthen their currencies.

Anticipating an Economic Recession

The U.S. not only entered a manufacturing recession in 2023. It reached its lowest level in three years. In its $2,075 gold forecast, VanEck also noted that tightening credit markets could push the entire U.S. economy into a recession. There's a reason Deutsche Bank asserts that an economic downturn is 100% inevitable.  

The Potential for Renewed Investment Demand

Finally, VanEck points to an anticipated increase in investment demand for gold to support its price target. The 2023 gold rally, although not experiencing considerable inflows into bullion ETFs, demonstrates that central banks and speculators can notably influence gold prices. If gold surpasses its record, it could spark a resurgence of positive sentiment among investors, trigger a surge in demand, and propel prices to unprecedented levels.

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Other Parts of The World are Even More Gloomy

The narrative surrounding VanEck's gold price target predominantly centers on U.S. economics and geopolitics. However, some comparably hopeless economic circumstances in other parts of the globe could also contribute to gold's upside. Gold is a borderless commodity, after all. 

Dwindling Global Growth and Rising Concerns

The World Bank has cautioned about a considerable slowdown in global growth for 2023, potentially the lowest since the 2008 financial crisis, due to rising interest rates, inflation, and stricter credit conditions. As per the World Bank's recent Global Economic Prospects report, global growth could slump to 2.1% from 3.1% in 2022, with the downturn expected to intensify in the year's second half.

Moreover, The World Bank revised its outlook downward for almost all advanced economies and reduced growth predictions for a staggering 70% of emerging markets.

Economic Crises in Lebanon, Argentina, and Turkey

Lebanon's economic meltdown, including a 269% inflation rate and national currency collapse, has already made headlines. Things, however, are going from bad to worse, according to The LA Times. A recent report revealed that Lebanon experienced the worst financial collapse since the 19th century, affecting even garbage. The situation is so bad that groups of trash sorters actually have low-level turf wars surrounding neighborhood dumpsters.

Argentina and Turkey are also facing severe economic challenges. A serial debt defaulter, Argentina has recently increased its interest rates by 97% amidst another financial crisis. Turkey's economic situation has deteriorated further, with the lira hitting an all-time low against the U.S. dollar after President Recep Tayyip Erdogan won a third term.

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China's Slowing Economy and Deflation Fears

China, the world’s second-largest economy, is experiencing an economic slowdown of its own as well. Despite government efforts, the rate of economic stimulation is not keeping up with the decline. On June 19, 2023, Goldman Sachs cited weak Chinese economic data for the second consecutive month and joined Wall Street banks UBS and JP Morgan in downgrading their growth expectations. Current indications suggest that the situation may not improve in June, increasing concerns about slowing domestic activity and deflation fears.

The Key Takeaway

Even with current optimism in equity markets, global economic indicators suggest challenging times ahead. From looming recessions to geopolitical tensions and a de-dollarization, we're witnessing a confluence of factors that could drive gold prices to unparalleled heights. 

VanEck's prediction of gold hitting a record $2,075 per ounce looks feasible when considering the likely surge in investment demand and largely overlooked global economic challenges. The future is indeed uncertain, but one thing is clear - we can't easily ignore the signs pointing to this golden price milestone. 

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