The Fed is likely to try to raise interest rates to around 3.5% this year and potentially to 4% next year. According to a market analyst, even in this case, the gold market will remain in a healthy position.
“Gold investors are starting to realize that the Fed is in trouble”
State Street Global Advisors chief gold strategist George Milling-Stanley gave it in a recent interview. As we reported as Kriptokoin.com , the Fed made the biggest move of the last 28 years with an increase of 75 basis points. The strategist says he is not surprised that gold is holding up well after the Fed’s decision.
As it will be remembered, inflation reached its highest level in 40 years with 8.6% last month. This prompted the Fed to aggressively tighten its monetary policy. But Milling-Stanley says gold investors are beginning to realize that the Fed and its leader, Jerome Powell, are in a very dangerous position. The strategist explains:
The Federal Reserve is walking a very narrow tightrope. Powell wants to drown some demand problems to keep inflation down. But he doesn’t want to put the economy into recession.
“In both cases, gold investors win”
In addition, Milling-Stanley states that every decision the Fed makes will be positive for gold. He explains the reason for this view as follows:
If the Fed doesn’t raise interest rates fast enough, inflation will continue to rise. On the other hand, if they move too fast, they will run the risk of recession. Both of these scenarios are positive for gold. Either way, gold investors win.
Strategist not worried about rising real rates
Increasing risks to the US economy were also reflected in the latest economic forecasts of the Central Bank. The US central bank forecasts US GDP to grow by 1.7% over the next two years, a sharp drop from GDP projections of 2.8% and 2.2%, respectively.
The Federal Reserve’s aggressive monetary policy stance will start to raise real interest rates. This is a negative headwind for gold as an unproductive asset. But Milling-Stanley says investors should focus on the broader landscape.
The strategist adds that real interest rates will not be high enough to provide investors with significant protection from rising volatility and economic uncertainty. He says research shows that real returns must rise above 2% before it becomes a problem for gold investors. In this context, the strategist uses the following expressions:
We’re still a long way from where returns should frighten investors.
“Gold remains the best defensive asset”
Besides low interest rates, Milling-Stanley says gold will continue to be an important portfolio diversifier. The reason for this is the sales in both stock and bond markets. Gold holds its ground after the Fed’s 75bp move. However, the S&P fell more than 3% on Thursday.
Also, yellow metal prices remained relatively unchanged during the year. On the other hand, the S&P 500 fell more than 23%, entering bear market territory. The strategist makes the following assessment:
Despite rising interest rates, gold remains the best defensive asset investors need. The precious metal can answer many of the questions investors are currently asking themselves and their advisors.
How much does the yellow metal need in a good portfolio?
So how much gold should an investor keep in his portfolio? Milling-Stanley says investors should hold somewhere between 2% and 10% on average in their portfolios. The strategist also notes:
In troubled times, research shows that investors should double their risk by up to 20%. I’m not saying everyone should go to 20%. But according to our research, this is the most optimal level mathematically.
