Editor’s Note: With so much market volatility, stay on top of the daily news! Catch up with our quick roundup of today’s must-read news and expert opinions. Sign here!
(Kitco News) – Gold prices will remain well supported through the rest of the year as rising recession and stagflation fears dominate sentiment in financial markets, according to a market analyst.
In an interview with Kitco News, Kristina Hooper, chief investment strategist at Invesco, said gold managed to hold its own after the Federal Reserve took the extraordinary step of raising interest rates by 75 basis points last week. This was the biggest increase in the rate in nearly 30 years. However, Hooper added that this shows how worried the US central bank is about inflation.
“Gold is holding up because the 75 basis point move was a huge red flag for many investors that the Federal Reserve is going to push the economy into a recession,” she said.
Alongside its unprecedented move, the U.S. central bank signaled that another 75 basis point move could take place in July and that the Federal Funds Rate could reach 3.50% by the end of this year and hit 4% in 2023.
The Fed’s aggressive stance is helping to lift real yields, which are traditionally negative for gold, a non-yielding asset. However, Hooper noted that investor fear, as equity markets delve into bear market territory, is driving demand for safe-haven gold.
“Gold will continue to do well as the Federal Reserve is seen as pushing the US economy into a recession,” she said. “It changed the normal relationship between gold and interest rates.”
Although Hooper continues to see higher gold prices and weaker equity markets for the rest of the year, she said the feeling of fear may be a bit overblown. While the Fed’s path to designing a soft landing has shortened, Hooper said it can still be achieved.
Hooper said that while the threat of inflation continues to rise, the job market remains healthy. She added that if American workers can remain employed, the US economy must avoid a recession.
“We may still have a situation where the tightening leads to a downturn, but maybe that leads to fewer job openings and fewer layoffs,” she said. “That would certainly ease the pressure from growth. That’s how we soften demand, but we don’t go into recession.”
While recession risks are now high, Hooper said the Federal Reserve had no choice but to act as aggressively as it did. While inflation hit a new 40-year high last month, Hooper said the real fear is the expectation that inflation will remain high for the foreseeable future.
On the same day, the US Department of Labor said its Consumer Price Index rose to 8.6% in May, the University of Michigan released its preliminary consumer opinion survey. Consumers in the survey said they see inflation hovering around 3.3% over the next three to five years.
Hooper noted that over the past year, long-term inflation expectations have been reasonably stable, so the recent rise was a significant shock to some economists.
“It’s concerning because that’s how we get into a self-fulfilling prophecy of higher inflation for longer,” she said.
Hooper added that in this environment, the Federal Reserve will continue to advance its monetary policy, raising interest rates aggressively now to bring these expectations closer to the long-term average.
As for the interest rate hike, Hooper said he expects the central bank’s updated 3.4% estimate is likely to be the watermark. She added that inflation expectations are relatively low compared to other periods, such as the 1980s, when Fed Chair Paul Volker raised interest rates so high that it killed inflation but pushed the economy into recession. . She explained that in the 1980s, long-term inflation expectations were around 9.7%.
“I’m not going to discount the current inflationary environment, which is why it’s a good time to invest in gold,” she said.
Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article are not responsible for losses and/or damages arising from the use of this publication.