The Federal Reserve Has Peaked And It’s Good For Gold – WisdomTree
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(Kitco News) – The gold market is trading relatively flat on the year after falling through critical support at $1,850 an ounce. However, despite the recent weakness, the precious metal has held up against strong headwinds, according to Nitesh Shah, head of commodities and macro research at WisdomTree.
In a recent interview with Kitco News, Shah said gold prices are still on their way back to $2,000 an ounce even as the Federal Reserve embarks on an aggressive tightening cycle. He added that his updated forecast models indicate that gold will hit $2,300 by the first quarter of 2023.
Although gold has struggled over the past few weeks, Shah said he doesn’t see the potential for a major path in the market. He added that falling gold prices could spark renewed interest as investors fear the Federal Reserve may be on the verge of making a policy mistake.
“Many smart investors are starting to wonder if central banks will push the global economy into a recession to stamp out inflation,” he said. “It may not be a base case scenario, but there are significant downside risks.”
Shah added that he expects the Federal Reserve, aware of the risks of a policy error, to exercise caution. The central has signed that it could raise interest rates by 50 basis points at the next two meetings; however, Federal Reserve Chairman Jerome Powel pushed back market expectations for a 75 basis point move.
“I expect we’ve hit the peak of aggressiveness and that will be good for gold,” he said.
Although the US central bank will continue to raise interest rates throughout the year, Shah said he wonders whether or not that will reduce inflation.
“Higher interest rates will reduce demand inflation, but that’s a secondary component of inflation. It’s not the primary component. The tools the Fed has are not really tailored to deal with supply issues,” he said.
The only thing that will fix supply issues, Shah said, is government infrastructure spending.
“It will take years to get the infrastructure needed to improve the supply chain,” he said.
Shah added that he expects the Federal Reserve to be as aggressive as possible to ensure that long-term inflation expectations remain well anchored.
Shah believes that Russia’s war in Ukraine will keep energy and food prices high throughout the year.
On Wednesday, the US Department of Labor said in its latest Consumer Price Index report that energy prices have risen more than 30% in the past 12 months. At the same time, food prices rose by more than 9%.
Overall consumer prices rose 8.3% for the year, warmer than expected.
As for the US dollar, which has been a significant headwind for gold, Shah said he thinks it could be close to a peak. He added that the divergence in monetary policy between the Federal Reserve and other central banks like the Bank of Japan and the European Central Bank had pushed the US dollar higher.
However, he said the ECB would start raising rates at some point and the monetary policy gap would start to close. At the same time, he said investors’ attention could return to the US government’s huge twin deficits.
“At some point the US dollar trend will change and we will see gold prices start to rise again,” he said.
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