The gold market has seen sharp declines over the past three months as US dollar and bond yields soar. Meanwhile, the US Federal Reserve’s (FED) monetary policy decision to be announced on Wednesday this week pushed many investors and traders aside, according to analysts. According to the CME FedWatch Tool, markets see more than a 77 percent chance for a 75 basis point move. Analysts said gold continues to struggle as the Fed expects to reiterate its hawkish position for more aggressive rate hikes in the fall. Here are the current expectations…
John Hathaway: Gold is priced in relation to the Fed
Sprott Hathaway senior portfolio manager for special events strategy, John Hathaway, said that while gold still faces tough headwinds, the fundamental outlook is starting to change. Hathaway’s bullish outlook for gold comes as markets expect the Fed to raise interest rates by 75 basis points on Wednesday. Hathaway said that one of the reasons gold is soaring is that the US central bank is closer to the end of the tightening cycle than to the beginning. He added that tight monetary policy is likely pushing the US economy into recession. The portfolio manager used the following statements:
The Fed’s hawkish stance is crashing the economy. If you look at the economy in real time, it’s falling. Any sign that the Fed is giving up on rate hikes will be good for gold.
Hathaway said he expects the central bank to start changing the pace and slowing rate hikes by the end of the summer. He added that the central bank would not want to plunge the economy into recession before the November elections. Inflation expectations are as follows:
By the end of the summer, inflation could moderate at 9 percent. The Fed can declare victory. But moderation is not a victory, inflation is still high and will continue to be a problem for consumers.
Recession threat continues
Currently, the biggest headwind for gold is the US dollar. Last week, the dollar hit a 20-year high and reached parity with the euro. Although the US dollar is out of its highs, it still remains resilient. Looking ahead, however, Hathaway said he expects the US dollar to have less of an impact on gold. Alongside the growing threat of a recession in the US, Hathaway said she also saw signs of a potential debt crisis in Europe. Last week, the European Central Bank surprised the markets with an increase of 50 basis points. The ECB also announced that it will continue to buy bonds from troubled countries to ensure that the European bond market is not fragmented. The analyst used the following statements:
A sovereign debt crisis could easily bring gold prices back to record highs regardless of where the US dollar is. The next black swan will be tied to the unruly currency markets. I’ve been in the gold market there, where systemic risks in financial markets are higher than they’ve ever been in 20-odd years.
2-10 percent of portfolios must have gold
Not only is the fundamental outlook for gold starting to change, but Hathaway said the speculative position of the market is ripe for an upside trade. He added that sentiment in the gold and mining sector has reached several-year lows. “I look at these numbers as a sign of emotion and that people are hopeless, discouraged. “You get these dramatic rallies from these low points in terms of psychology,” he said.
Hathaway said that in the current environment, there is a debate that needs to be had about how much gold investors should hold. Research from the World Gold Council suggests that investors should hold gold between 2 percent and 10 percent of their portfolio. “Physical gold has proven to be a major diversifier over the last 20 years,” Hathaway said. For a conservative investor who wants real protection, 5 percent of your portfolio isn’t crazy,” he added.
What does the rise in the US dollar mean for the precious metal?
Meanwhile, while some analysts expect gold to move higher this week, it will be at the mercy of the US dollar, which may see new momentum following the central bank’s monetary policy decision. Currency analysts at Brown Brothers Harriman said they continued to rise above the US dollar despite seeing three consecutive days of losses. Analysts used the following statements:
We are not yet ready to change our strong dollar call. Yes, US economic data is weakening, but we don’t think a recession is imminent. When all is said and done, we believe the US economy remains the most resilient. However, we expect a period of consolidation for the dollar until the US economic outlook is clear.
Commodities analysts at TD Securities said gold is facing a tough battle despite some changing sentiments in the market. Analysts said gold prices must rise above $1,775 an ounce to threaten the current downtrend.
