(Kitco News) – Gold prices will remain well supported through the rest of the year as rising recession and stagflation fears dominates sentiment throughout financial markets, according to one market analyst.
In an interview with Kitco News, Kristina Hooper, Chief Investment Strategist at Invesco, said that gold was able to hold its ground after the Federal Reserve took the extraordinary step of raising interest rates by 75 basis points last week. This was the biggest rate hike in nearly 30 years. However, Hooper added that it shows just how worried the U.S. central bank is about inflation.
“Gold is holding its ground because the 75-basis point move was a massive red flag for many investors that the Federal Reserve is going to push the economy into a recession,” she said.
Along with its unpreceded move, the U.S. central bank signaled that another 75 basis point move could come in July and that the Federal Funds Rate could push as high as 3.50% by the end of this year and hit 4% in 2023.
The Fed’s hawkish stance is helping to drive up real yields, which is traditionally negative for gold, a nonyielding asset. However, Hooper noted that investor fear, as equity markets fall deeper into bear-market territory, is driving safe-haven demand for gold.
“Gold will continue to do well as the Federal Reserve is seen as hurtling the U.S. economy into a recession,” she said. “That has changed the normal relationship between gold and interest rates.”
Although Hooper continues to see higher gold prices and weaker equity markets through the rest of the year, she said that the fear sentiment could be a little overdone. Although the Fed’s path to engineering a soft landing has narrowed, Hooper said it can still be achieved.
Hooper said that although the inflation threat continues to build, the labor market remains healthy. She added that if American workers can remain employed, the U.S. economy should avoid a recession.
“We can still have a situation where tightening leads to a slow down, but maybe that leads to fewer job openings and less in the way of layoffs,” she said. “That would certainly take pressure off of growth. That is how we soften demand, but don’t go into a recession.”
Although recession risks are now elevated, Hooper said that the Federal Reserve had no choice but to act as aggressively as it did. Although 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 U.S. Labor Department said its Consumer Price Index rose to 8.6% in May, the University of Michigan released its preliminary consumer sentiment survey. Consumers in the survey said that they see inflation hovering around 3.3% in the next three to five years.
Hooper noted that for the last year, long-term inflation expectations have been reasonably stable, so the recent rise was a significant shock for some economists.
“It is 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 frontload its monetary policy, raising interest rates aggressively now, to bring those expectations with the long-term average.
As to how high interest rates will go, Hooper said that she expects the central bank’s updated estimates of 3.4% will probably present the highwater mark. She added inflation expectations are relatively low compared to other periods, like in the 1980s when this Fed Chair Paul Volker raised interest rates so high that it killed inflation but pushed the economy into a recession. She explained that in the 1980s, long-term inflation expectations were around 9.7%.
“I’m not going to dismiss the current inflationary environment, which is why it’s a good time to be a gold investor,” she said.
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