The tale of gold price this year has been one of U.S. dollar strength. Even so, Wells Fargo’s head of real asset strategy John LaForge finds current valuations puzzling. As he notes, gold would have already passed $1,900 if not for the dollar’s relative strength when compared to other currencies. While the inflation rate alone is making everyone wonder how much longer this strength can persist, LaForge believes we could see six more months of unusual dollar strength:

Our base case is that the U.S. will enter a recession somewhere in October or November, which will last until the middle of next year. Typically the dollar loses strength when signals say we are coming out of recession. So, if our base case is correct, you could see the dollar start acting weaker in Q1 of next year in anticipation of that.

Two crucial factors in gold’s price

Kitco maintains an excellent resource explaining the two crucial factors in gold’s price: demand and dollar strength or weakness. In short, the dollar affects gold’s price this way:

When the US Dollar gets stronger, it takes fewer dollars to buy any commodity that is priced in $USD. When the US Dollar gets weaker it takes more dollars to purchase the same commodity… When the dollar gets strong, gold appears to go down, and vice versa. That accounts for part of the fluctuations that we see in the value of gold.

Dollars get stronger based on demand, just like any other asset. For the time being, dollars are likely to remain a preferred safe haven option for central banks and institutional investors, who think of dollars as a convenient alternative to gold (with some obvious shortcomings). Wells Fargo retains its $2,000-$2,100 target for gold before the end of the year, stating that only a bout of unexpected dollar strength could inhibit this prediction.

LaForge doesn’t place much hope in the tightening schedule bearing the desired fruit. More specifically, he expects the long-term inflation rate to remain elevated around 3%-4%. For all their talk, LaForge thinks that Federal Reserve officials have already found 75-basis-point hikes untenable, even if they’ve done relatively little to slow down inflation.

Although consumer price increases look poised to remain the Fed’s primary concern by a wide margin, they’re unlikely to want to or have the option to hike above 50 basis points anymore. How gold performs in a recession depends on how severe the economic crisis is. Although LaForge finds a mild recession more conductive for gold’s price, it’s easy to see how an economic downturn of any magnitude could boost gold’s price. A recession, let along a period of stagflation, are tailor-made for precious metals outperformance.

Another asset LaForge is interested in are cryptocurrencies, with the analyst taking the bold standpoint of crypto enthusiasts who liken them to the internet. Crypto’s price action, said LaForge, depends entirely on how heavily the government can or wants to control digital assets.

“What’s looming in the next couple of years is the government coming in and regulating. The question is, how much? Do they take a light-glove approach as they did with the internet or a heavy-handed one? You have the example of the internet being regulated lightly. But that was with information and communications, which is important, but arguably not as important as money,” said LaForge of the asset class that is currently in its fourth bear cycle.