Gold prices may go lower, but now is the time to build a strategic position
Now is the time for investors to look at building a strategic position in the gold market, according to one market strategist, as gold prices are expected to struggle in the short term due to rising bond yields at the short end of the curve. He says gold prices can go lower, but now is the time to build a strategic position
In an interview with Kitco News, Ronald-Peter Stöferle, managing partner and fund manager at Incrementum AG and one of the authors of the annual In Gold We Trust report, said he expects to see lower gold prices in the near term as markets begin to price in further aggressive monetary policy actions from the Federal Reserve.
Persistently higher inflation has led markets to believe that the Federal Reserve will raise interest rates by 50 basis points next month. These shifting expectations have pushed the yield on US two-year Treasury bonds above 4.6%, the highest level since 2007.
At the same time, the yield on one-year government bonds is above 5%. Stöferle noted that when looking at inflation expectations, real bond yields are currently yielding positively.
However, Stöferle added that he believes the gold market will continue to show relative strength despite the selling pressure. He explained that he sees the price action and the resilient strength in gold as the market calling out the hawkish rhetoric of central banks.
Stöferle said this market trend indicates that it is only a matter of time before the US falls into a recession and the Federal Reserve is forced to wind down its aggressive tightening. He expects that as soon as unemployment starts to rise, the Fed will quickly cut interest rates.
While there is growing optimism in the market that the US can avoid a recession, Stöferle said many investors have underestimated the time lag in monetary policy. He added that the Federal Reserve has already made its policy mistake and that it is only a matter of time before something breaks.
Not only has the Federal Reserve raised interest rates by 450 basis points this tightening cycle, but it has also reduced its balance sheet by $500 billion. Stöferle said it is only a matter of time before the economy feels the effects of reduced liquidity in the market.
“It’s like being in a room that’s running out of oxygen. At first you might not notice anything, but then it gets harder to breathe. Soon you’re rushing for the exits, hoping to get out before it’s too late,” he said. “Not only is the risk of a recession increasing, but I think we could see a major financial crisis.”
In this environment, Stöferle said that now is the time to take advantage of lower gold prices and build a strategic position for the second half of the year. He added that one strategy investors should look at is building a position through cost averaging, looking to buy at progressively lower prices.
Despite lower prices in the short term, Stöferle said gold prices are still on track to end the year above $2,000 per troy ounce.
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