According to Axel Merk, Chairman and CIO of Merk Investments, the Fed pivot will push the gold price to new heights. However, Merk says that a drop to $1,100 is also a possibility.
“Gold investor doesn’t believe Fed will stay hawk for longer”
After a bull rally in 2011, gold corrected 40% from its July 2011 highs, before bottoming near $1,000 in 2015. Axel Merk says that if the Fed continues to tighten its monetary policy stance, it is possible to repeat this price pattern this time. He notes, however, that this is ‘unlikely’ for now. In this context, Merk makes the following statement:
The gold investor does not believe that the Fed can raise interest rates for a longer period of time. This tightening is an appropriate policy today, but the Fed will blink at some point. The Fed has tried to combat high inflation throughout the year. Even so, the price level is unlikely to decline in the short term. It is possible for us to experience a period of stagflation for a long time. The problem with high inflation is that it just goes down and doesn’t stay there. Given its price history, gold is a volatile investment.
Do we have a Fed pivot ahead of us?
Axel Merk says the Fed’s only tool in fighting inflation is the ‘sledgehammer’ to reduce demand through high interest rates. But he adds that they will not be able to maintain a strict policy position. Based on this, Merk makes the following assessment:
The Fed really wants to see things deteriorate. It is possible for them to rarely maintain strict policy for as long as they want to. Because the things that grab their attention get spoiled.
The Merk points to the Bank of Canada’s latest rate hike of 50 bps, lower than expected. It expresses a potential turn signal without tightening. In line with this, Merk suggests that the Fed may consider a similar move. Also, he comments:
Something will happen that threatens the stability of the financial system. At this stage, the Fed will say it has tightened too much. In addition, financial stability is the one and only goal they strongly care about.
Financial stability is not an official duty of the Fed. However, Merk says this is an implicit task. Because, he notes, the survival of the banking system is at the core of the Fed’s mission.
What will be the gold price after the pivot?
According to Axel Merk, gold and gold miners will benefit after the Fed’s axis as investors flock to gold as a safe asset and portfolio diversifier. Merk explains his views as follows:
Gold tends to react sooner than stocks. Most stocks bottom out late. Whereas gold miners and gold peak much earlier at the earliest signs of a pivot.
cryptocoin.comAs you follow, gold is currently trading around $1,650. The price of the yellow metal has dropped almost 10% throughout the year. Merk argues that although gold is ‘associated’ with other assets such as stocks and bonds, these correlations will be distorted. He explains the reason for this as follows:
Gold has historically served as a diversifier. He has played this role less and less lately. Also, it had more correlations. When these correlations come together, they break apart again. I think gold will continue its portfolio diversification role.
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