The price of gold is a cheap hedge as the Fed cannot control supply-side inflationary pressures
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(Kitco News) – The Federal Reserve is on the cusp of a change in monetary policy, but it will not be enough to stop growing inflationary pressures and it is only a matter of time before investors return to gold for their fortunes protection. according to a market strategist.
As the Federal Reserve begins its two-day monetary policy meeting, expectations grow that the central bank will reduce its monthly bond purchases. At the same time, the markets are already pricing in an interest rate hike in June. However, Robert Minter, director of investment strategy at abrdn (formerly Aberdeen Standard Investments), said in a recent telephone interview with Kitco News that the Federal Reserve’s new restrictive tones will not be able to stop the rise in inflation.
“Tighter monetary policy will not solve the backlog in the ports; it will not bring new microchips online,” he said. “All they’re going to do is create a new hurdle to increase Cap-Ex when it’s really needed. Federal Reserve policies cannot solve supply-side problems.”
Minter added that the ultimate risk is that rising inflation will lead to stagflation as global consumption falls.
“The ultimate sweet spot for gold is stagflation because there is higher inflation and a lower US dollar,” he said. “Right now, investors are not entirely convinced that stagflation is the scenario that will play out in the future but could change quickly. You certainly cannot take stagflation out of the realm of possibility.”
Turning to the gold market, Minter said it was only a matter of time before current price attracts investors looking for protection and value.
“If you look at where the real returns are right now, it looks like the price of gold should be closer to $ 1,900 than $ 1,800 an ounce. Gold seems cheap to us right now, ”he said.
“Until the government finds a way to get rid of its $ 28 trillion debt and the $ 8 trillion on the Fed’s balance sheet, we’re not sellers of gold,” he added.
Not only is the Federal Reserve unable to fix inflation driven by the ongoing global supply crisis, but Minter said that rising demand for commodities will keep inflation high for an extended period of time.
Minter added that the global push for more renewable, cleaner energy will further fuel demand for commodities like copper and aluminum.
“The government threw a lot of money into the economy and still not solved a single problem,” he said. “It will take a lot more money to improve infrastructure and build a green economy. You can’t spend all that money and you can’t have higher inflation.”
Along with gold, Minter is also bullish on silver as the metal will benefit from the green energy revolution. He added that like copper and aluminum, silver will quickly become an indispensable industrial metal.
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