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In a report published Monday, Joe Foster, portfolio manager, and Imaru Casanova, deputy portfolio manager, for the investment firm’s gold strategy, said that although the Fed is looking to raise rates aggressively this year, including two 50 basis point increases in The next two meetings, rising inflation will continue to keep real interest rates low until 2022.
Markets anticipate that the Fed may be more aggressive than suggested in the March monetary policy meeting minutes. The CME FedWatch tool shows that markets are pricing in the potential for interest rates to rise above 3% by the end of the year.
At the same time, inflation pressures continue to rise. On Tuesday, the US Consumer Price Index showed that annual inflation rose 8.5% in March, topping economists’ expectations. Inflation pressure has reached a new multi-decade high.
Gold prices rose to a four-week high on Tuesday after the latest inflation data. Gold futures for June were last traded at $1,971.90 an ounce, up 1.20% on the day.
“The Fed has to navigate choppy waters, made more ruthless by the ongoing war. It has to be aggressive enough to have a real chance of fighting inflation, but careful not to push the economy into recession. Both persistent inflation and/or persistent inflation and/or A recession would be positive for gold.
VanEck also notes that gold does well in the tightening cycle.
“Based on average returns, gold outperformed US stocks (as represented by the S&P 500) and the US dollar (as represented by the US dollar index) in the six and twelve months after the first cycle rally, even though it underperformed in the months that preceded it.”
Gold is still finding support from Russia’s ongoing war in Ukraine, Foster and Casanova said. They explained that Western sanctions on Russia could affect the reserves of the global central bank as countries diversify away from the US dollar.
“According to BGM, gold represents less than 1% of global financial assets, and a relatively small percentage of the total reserves of many large economies,” analysts said. “A relatively small increase in the percentage of global financial assets dedicated to gold, from, say, just under 1% to 2%, could lead to a doubling of demand — and with it, the price of gold.”
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