30% Upside as Fed Cuts Interest Rate

Amidst the stock market’s record-breaking ascent, gold, a steadfast refuge for investors, has also been on the rise. Last week, gold prices reached an unprecedented $2,328.7 per ounce. This surge, according to renowned economist David Rosenberg, president of Rosenberg Research, could propel gold to a staggering $3,000 before the next business cycle shift, marking a potential 30% increase from its current levels.

Rosenberg’s optimism about gold’s future performance is particularly noteworthy given the metal’s recent accomplishments. Gold has not only outperformed significant currencies and even bitcoin but has also thrived despite facing traditional macroeconomic headwinds that typically dampen its value. “The gold price’s ascent during a period marked by a strong dollar, declining inflation expectations, and the Fed’s ‘higher for longer’ interest rate outlook is especially impressive,” noted Rosenberg’s team. These factors usually spell trouble for gold prices, yet it has continued to advance.

Behind gold’s recent surge lies a shift in demand dynamics rather than supply changes, which have remained consistent in recent years. Central banks worldwide are rekindling their interest in gold as a reserve asset amidst growing economic uncertainties and a diversification away from an overreliance on the US dollar. Countries like Japan, Russia, Turkey, and Poland increasingly turn to gold for stability. Rosenberg highlighted that central banks significantly increased their gold holdings in the third quarter of 2023, a stark contrast to the divestment seen in the early 2000s.

Moreover, the demand for gold is also surging in emerging markets like India and China, whereas interest from Western investors has waned due to high-interest rates and a booming stock market. Industrial demand, particularly from the electronics sector, boosts gold prices, driven by the burgeoning need for circuitry in AI-related technologies.

Rosenberg attributes gold’s rally to the growing geopolitical risks and an unpredictable macroeconomic landscape. With the US debt-to-GDP ratio soaring to 120% and the cost of debt servicing rising, investors gravitate towards gold amidst uncertainties surrounding election outcomes and the potential for a fiscal crisis.

Looking ahead, Rosenberg envisions a promising future for gold, predicting another 15% to 30% upside as central banks begin to lower interest rates. He outlines two potential scenarios: a ‘soft landing’ and a bear market. In the soft landing scenario, if global real interest rates revert to their pre-2000 averages, this could lead to a significant drop in the US dollar and a corresponding rise in gold prices. Conversely, a recession could see real interest rates align with their 2014-2024 averages, stabilizing stock markets and depreciating the dollar, potentially pushing gold prices into the $2,500 range.

Rosenberg’s analysis suggests limited downside risk for gold but considerable growth potential, making it far more likely for gold to reach $3,000 per ounce than to fall back to $1,500. Rising geopolitical tensions could further fuel this ascent.

Rosenberg’s advice is clear for investors: incorporate gold into your portfolio and consider overweighting it. While a short-term correction is possible, the long-term outlook for gold is compellingly positive, offering tantalizing upside potential.

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