Goldman Sachs' Hatzius: Short Dollar, Go Long Gold Amid 45% Recession Risk

Goldman Sachs' Chief Economist, Jan Hatzius, has recently made a bold prediction regarding the current economic climate. In his latest report, Hatzius has suggested that the only trade he is confident in at the moment is shorting the U.S. dollar and going long on gold. This prediction comes amidst a backdrop of economic uncertainty and fluctuating market conditions.

Hatzius's stance on the dollar and gold is a significant shift from his previous economic forecasts, which have been characterized by their volatility. His latest report aims to restore his credibility by adopting a cautious approach, acknowledging the potential for an economic downturn while also highlighting the opportunities that exist in the current market environment.

The move to short the dollar and go long on gold is not without precedent. In the past, similar strategies have been employed by top-tier asset management firms, who have successfully capitalized on the dollar's weakness and gold's strength. The current economic climate, marked by trade tensions and geopolitical risks, has created an environment where these trades are particularly attractive.

The decision to short the dollar is based on several factors, including the potential for further trade tensions and the impact of tariffs on the U.S. economy. The tariffs imposed by the U.S. on various countries have led to a situation where the dollar's value has been under pressure, despite the strong U.S. economy. This has created an opportunity for investors to profit from the dollar's weakness.

On the other hand, the decision to go long on gold is driven by the metal's status as a safe-haven asset. In times of economic uncertainty, gold has historically performed well, as investors seek to protect their wealth from market volatility. The current economic climate, with its trade tensions and geopolitical risks, has created an environment where gold is particularly attractive.

Hatzius noted that the U.S. government is softening some of its more aggressive tariff policies. Recent adjustments include pausing retaliatory tariffs for 90 days, exempting certain ICT products from tariffs, and modifying tariffs on automotive parts to avoid overlap with steel and aluminum tariffs. These changes are expected to lead to preliminary trade agreements with some countries, improving the negotiation atmosphere.

Despite these adjustments, Hatzius acknowledges that the risk of a recession within the next 12 months remains at 45%. He anticipates that sectors such as pharmaceuticals and semiconductors may still face additional tariffs, and the temporarily suspended retaliatory tariffs could still be implemented. Economic data typically lags behind, and the advance purchasing behavior exacerbates this delay. Survey data, while imperfect, indicates a deterioration that exceeds typical recession levels, particularly in consumer and business expectation indicators.

Hatzius also highlighted the uncertain outlook for the Federal Reserve's monetary policy. He has pushed back the expectation for the first interest rate cut from June to July, still anticipating three rate cuts for the year. He emphasized that President Trump's criticisms will not influence the Federal Reserve's decisions, as long as inflation expectations remain stable. However, he expressed concern that the White House might gain the power to dismiss Federal Reserve officials without justification, which could severely undermine the central bank's independence and potentially lead to higher inflation.

In conclusion, Hatzius advised investors to be cautious during this delicate period. While current economic data is better than expected, risk assets have already overreacted to this positive news. If trade agreements are reached in the coming weeks, the market may continue to rise. However, the strategists at Goldman Sachs warn of the high risks associated with chasing these gains in the face of potential price inflation, supply chain disruptions, and unemployment surges. Their most confident recommendation remains to short the dollar and go long on gold, while also favoring British government bonds, copper, and natural gas, but being bearish on oil.