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(Kitco News) – Gold prices still have room to rise even as the Federal Reserve and other central banks around the world tighten monetary policy, according to VanEck’s latest outlook.
In a report released Monday, Joe Foster, portfolio manager, and Imaru Casanova, deputy portfolio manager, for the investment firm’s gold strategy, said that while the Federal Reserve intends to raise interest rates aggressively this year, including two 50 basis point hikes next year Both sessions, rising inflation will continue to keep real interest rates low into 2022.
Markets expect the US Federal Reserve to be even more aggressive than suggested in the minutes of the March policy meeting. The CME FedWatch tool shows that markets are pricing in the possibility that rates will rise above 3% by the end of the year.
At the same time, inflationary pressures continue to rise. Tuesday, the US CPI showed annual inflation rose 8.5% in March, beating economists’ expectations. Inflationary pressure reached a new decade high.
Gold prices rose to a four-week high on Tuesday following the latest inflation data. June gold futures were last traded at $1,971.90 an ounce, up 1.20% on the day.
“The Fed must navigate choppy waters made even rougher by the ongoing war. It must be aggressive enough to stand a real chance of fighting inflation, but be careful not to push the economy into recession. Both continued inflation and/or a recession would be positive for gold,” the analysts said.
VanEck also noted that gold traditionally performs well in a tightening cycle.
“Based on median returns, gold even outperformed US equities (as represented by the S&P 500 Index) and the US dollar (as represented by the US Dollar Index) in the six months and 12 months following the first upleg of the cycle surpassed it despite underperforming in previous months,” the analysts said.
Foster and Casanova said gold continues to find support from Russia’s ongoing war in Ukraine. They explained that Western sanctions on Russia could hurt global central bank reserves as nations diversify away from the US dollar.
“According to BGM Group, gold represents less than 1% of global financial assets and a relatively small percentage of the total reserves of several major economies,” the analysts said. “A relatively small increase in gold’s share of global financial assets from, for example, just under 1% to 2% could double demand – and thus the price of gold.”
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