Gold pullback offers profit opportunity as debt risks grow, says analyst

Investors are increasingly frustrated by the gold market, which has recently experienced its second 4% single-day rout on Thursday since the war between the US, Israel, and Iran began.

This conflict is generating considerable economic instability, pushing both energy costs and inflation upward.

While gold prices might decline further in the short term, these volatile periods and corrections offer true profit opportunities for investors, Tavi Costa, founder and CEO of Azuria Capital, said in an interview with Kitco.com.

Market volatility and central bank stance

The long-term outlook for gold remains supportive of higher prices, driven by factors like rising government debt and limited central bank intervention.

Costa views the current drop in gold prices as mere "noise" within a larger, ongoing bull market for precious metals, which he believes is still in its nascent stage.

This bull market, according to Costa, is being increasingly propelled by deep-seated structural shifts in both the mining sector and the broader global economy.

Despite gold experiencing downward pressure from tighter monetary conditions and evolving interest rate forecasts, Costa maintains that the overarching macroeconomic environment remains firmly favorable to the metal.

Gold prices on COMEX fell sharply on Thursday to a more than one-month low, briefly slipping to $4,505 per ounce.

This drop was fueled by mounting inflation worries, which were exacerbated by the Middle East conflict's impact on energy prices.

Consequently, expectations are rising that major central banks will maintain high borrowing costs.

Despite sharply higher energy prices fueled by the Iran conflict, major central banks maintained a hawkish stance.

However, they acknowledged the profound uncertainty surrounding the war's global economic impact, leading them to stress caution regarding upcoming policy decisions.

The European Central Bank chose to maintain current interest rates at Thursday's meeting. On Wednesday, the US Federal Reserve kept interest rates steady as well.

However, gold prices on COMEX have rebounded on Friday, and were up 2.3% at $4,712.69 per ounce.

“There’s zero chance this is the end of the cycle (for gold prices),” Costa said in the Kitco interview.

The core driver of gold's long-term trend, he argued, is the unsustainable level of global debt, rather than short-term market sentiment.

Specifically, he pointed to governments, especially in the US, where rising interest costs are increasingly dominating expenditure.

Gold and mining equities

Costa’s expectation is that policymakers will be compelled to lower rates—even if inflation or traditional economic indicators suggest otherwise—to alleviate the severe strain of debt servicing.

This policy shift, he believes, will create a significant positive environment for gold.

Despite gold's excellent performance last year, Costa argues that the sector remains under-owned and undervalued when considering the magnitude of the opportunity.

He highlights a historical comparison: today, US gold reserves equate to only about 3% of the federal debt, a stark contrast to the approximately 51% they represented in the 1940s.

He suggested that this imbalance highlights the significant potential for gold to increase in price, particularly if governments begin to replenish their reserves or work to strengthen confidence in their financial stability.

Costa's confidence isn't limited to gold; it encompasses mining equities as well.

He believes the mining industry is only in the "early innings of a major cycle," anticipating a significant acceleration in capital flows.

A striking feature of the current market, according to Costa, is the gap between metal prices and the valuations of mining companies.

Despite the significant rise in gold and silver prices, many producers are still trading at relatively low multiples.

In fact, some companies are achieving margins comparable to technology firms, thanks to production costs that are substantially lower than the current metal prices.

Costa believes the valuation gap stems from misplaced investor skepticism about sustainable high precious metals prices, citing increasingly acute and persistent supply constraints across the mining sector.