Gold continues to struggle to make steady gains above $1,700. There is an opportunity for prices to move lower for the rest of the year. However, one market strategist says that the current level of gold prices represents long-term value for investors.
“I would be careful about gold prices”
Stephen Land, vice president and portfolio manager of Franklin Templeton’s Franklin Gold and Precious Metals Fund, says gold’s current downward trend makes sense as the Federal Reserve continues to aggressively raise interest rates. However, he adds that he is optimistic about the precious metal, looking beyond short-term volatility. In this context, Land makes the following statement:
Towards the end of the year, I would be careful about gold. However, for anyone with a 12-month timeframe, it’s a pretty interesting time to look at gold as a value game.
“Probably the current tightening cycle will end prematurely”
Rising interest rates continue to put pressure on gold prices. However, Land says investors are beginning to question how much room the central bank has left. Markets expect the US central bank to raise the Fed Funds rate by 75 basis points in November and December. It also predicts that final interest rates will rise to 5% in the first half of 2023.
However, the Fed’s monetary policy is starting to wreak havoc on global markets, forcing the BOJ and BoE to intervene in local currency and bond markets. Land says these problems will only continue to grow. Additionally, he notes, it will likely cause the current tightening cycle to end prematurely. Based on this, Land makes the following assessment:
The Fed’s action is exporting a lot of inflation from the US. What’s more, it puts most of that burden on other countries. At some point, this will cause some geopolitical issues that will affect the US. The Fed is making the right moves based on local data. However, they are aware of their impact on the rest of the world.
“Fed stops raising rates, enough for bullishness”
Stephen Land adds that, due to heightened geopolitical uncertainty, the Federal Reserve is unlikely to raise interest rates high enough to bring inflation back to its 2% target. Land goes on to say:
The Federal Reserve does not have full control over inflation. As rates begin to slow down, the status of gold and its role as an inflation hedge becomes a little clearer.
Land says he doesn’t even need a full pivot in monetary policy in the current environment to attract new bullish momentum below the Fed. The Fed states that stopping raising interest rates will be enough to end the downtrend of gold. Investors will have to wait a little longer for the Fed to end the current tightening cycle.
“Now is the time to take a position for higher gold prices!”
However, Land notes that there are still great opportunities in the precious metals sector. Land makes the following statement:
Gold prices above $1,650 still represent solid value for mining companies. On average, mining companies see a profit margin of about $200 at current prices. It’s not the same margins we saw at the start of the year. But it’s still solid work. $1,650 isn’t a terrible price compared to what we’ve seen in the past.
Land notes that the mining industry is underperforming the gold market in the current downtrend. Still, he expects miners to outperform when the market returns. Moving from this, “Now is the time to position yourself for higher gold prices. “There is a lot of leverage in mining stocks right now,” he says.
