According to a market analyst, investors are a little too optimistic when it comes to the Federal Reserve’s potential cuts in interest rates by the end of the year. Therefore, the analyst expects a short-term turbulence for the gold price.
“Gold price will rise through 2023, but…”
George Milling-Stanley, chief gold strategist at State Street Global Advisors, says that while he expects gold to rise through 2023, he is a bit concerned that investors believe Federal Reserve Chairman Jerome Powell’s comments. Powell said on Wednesday that rates will remain high for the rest of the year to keep inflation down to the central bank’s 2% target.
cryptocoin.com Powell’s comments came after the Federal Reserve, in a highly anticipated move, increased interest rates by 25 basis points. Still, markets interpreted Powell’s words as dove, as inflation data indicated that it was starting to drop. At the press conference held after the central bank’s monetary policy decision, Powell emphasized the following:
It is pleasing to see that the process of fighting inflation has now begun. Now, for the first time, we can say that the disinflation process has started. And we’re really seeing this in commodity prices so far.
“The markets basically don’t believe Powell, but that’s wrong!”
Milling-Stanley notes that while focusing on disinflation comments, markets completely ignore the Fed’s other messages that its work is not done. Because, Powell said, “If the economy generally performs in line with these expectations, it would not be appropriate to cut interest rates this year or relax policy this year.” Milling-Stanley says that repricing interest rates in the market could create some selling pressure underneath, especially if the US dollar starts to rise. In this context, the analyst makes the following statement:
Markets basically say they don’t believe Powell, which worries me a lot. I tend to believe him when he says what to do.
“I expect even better for the gold price this year”
While changing interest rate expectations may create some volatility for gold, Milling-Stanley states that the market is still bullish as rising interest rates will create a worsening environment for equity markets. In this regard, he makes the following assessment:
I said last year that stock markets should fear the Fed more than gold, and I think that’s still the case. I think the Fed will raise interest rates above 5% this year. However, they will do this gradually and in small increments. We have left behind the days when small interest rate hikes would boost the dollar.
In December, Milling-Stanley and his team announced that their base case for gold is trading between $1,600 and $1,900. The bullish situation for the precious metal was as prices returned to all-time highs above $2,000. From this point of view, the analyst makes the following comment:
It’s good to see gold start the year in our bullish range, and I think there’s a very real possibility we’ll see $2,000 this year. Gold’s performance last year was actually very respectable. And I expect even better from gold this year.
“2023 will be brilliant for gold!”
Not only is the Federal Reserve’s monetary policy unlikely to provide new momentum for the US dollar, but Milling-Stanley adds that rising interest rates increase the risk of the US going into a recession. Despite Powell’s optimistic tone on Wednesday, Milling-Stanley says the recession remains a very real risk. He explains his views on this matter as follows:
The idea of returning to 2% inflation without a significant economic decline and a large increase in unemployment may be a somewhat heroic assumption. We will need to see a recession to bring inflation back to 2%. You have to hurt the economy to bring inflation down when it becomes so entrenched.
Milling-Stanley predicts a bright market for gold in 2023. He states that if the Fed ends the tightening cycle prematurely, it will create further weakness in the US dollar. He also adds that gold will be an attractive inflation hedge, as inflation is unlikely to drop to 2% again.
“Central banks provide solid support for gold price”
In the other scenario, Milling-Stanley says, a hawkish Fed pushing the economy into recession would make gold an attractive hedging tool. Historically, gold has seen double-digit returns in recessionary environments. Looking beyond US monetary policy, Milling-Stanley notes that there is enough geopolitical uncertainty to sustain the gold safe-haven offer for the remainder of the year.
Milling-Stanley says another factor it sees supporting gold through 2023 is central banks’ insatiable demand for the precious metal. Last year, central banks bought 1,136 tons of gold, the second-highest since 1955. The analyst uses the following statements on this subject:
These central bank figures were staggering. Central banks provide solid support for the gold price when there is any downside trend in the market.
Milling-Stanley adds that he expects central banks to continue buying gold for the foreseeable future, even if not at the record levels seen last year. “Emerging market central banks, on average, hold about two-thirds of their reserves in dollar-denominated assets and less than 5% in gold. And they want to change that ratio. They want less dollars and more gold,” he explains.
How much gold should be allocated in portfolios?
As for how much gold investors should have in their portfolios. According to research by the World Gold Council, the optimal amount of gold in a portfolio is between 2% and 10%. Milling-Stanley says investors may want to double their risk in times of uncertainty. In this context, he comments:
Last year, gold served investors well. I know I will never reduce my gold allocation this year. Investors should still be somewhere between 2% and 20%. I don’t think any of the reasons you held gold last year will go away in 2023.
