Markets are reacting to ever-changing Fed interest rate expectations. Therefore, investors expect gold and Bitcoin prices to remain volatile for the foreseeable future. However, according to one hedge fund manager, the precious metal still provides long-term value and protection in a portfolio.
“I know I like to hold gold”
According to Axel Merk, President and Chief Investment Officer of Merk Investments, many investors are disappointed with the price action of gold through 2022. However, he notes that gold has outperformed the bond and equity markets this year.
In recent weeks, many analysts have pointed out that the traditional 60/40 portfolio allocation has seen its worst start to the year since the mid-1930s. The S&P 500 is down more than 20% this year. Also, the bond total fell roughly 15%. Meanwhile, gold prices have slipped about 10% down so far this year. Because prices continue to provide support at about $ 1,650. Merk makes the following statement:
Diversification doesn’t work right now. Because everything is interconnected. But we know that in the long run, having a diversified portfolio pays off.
In the current environment, Merk says it’s important for investors to leave short-term volatility behind. It also urges a focus on long-term value, where gold is potentially brighter. In this context, Merk notes:
I don’t know where the gold will be tomorrow. Nobody else knows either. I know I like to hold gold. If you look at the curve, I think these high real interest rates that we have are not sustainable.
“The Fed will continue to raise interest rates until…”
The Federal Reserve continues to raise interest rates to cool the persistently high inflation. While many investors expect markets to remain volatile in the short term, they are wondering if the Fed will be able to hit its target before something breaks in the global economy and triggers a recession. The turmoil of the US economy is shaking international markets. Despite remaining relatively resilient, Merk says the Fed still has room to raise Fed interest rates in the current environment. Based on this, he comments:
We already know that the whole point of raising interest rates is to mess things up. The Fed hopes they can smooth things over. This seems more and more likely. The Fed will keep raising interest rates until something they care about breaks down.
cryptocoin.comAs you can follow, despite all the volatility in international markets, major central banks such as the BoJ and BoE had to intervene. But Merk says US money markets are still working. He adds that he suspects the Fed is monitoring credit spreads to make sure it doesn’t start expanding and threaten to explode.
At the same time, the tensions are too high. That’s why Merk finds it difficult to even take a full pivot in monetary policy to lure investors back into the gold space. It is also likely that the Fed will start printing money to fix any crisis in the near term, before interest rates start to fall. He explains his views on this matter as follows:
We know from years of debt crisis that policymakers are champions in kicking the box. Now, in the context of gold, my guess is that once this patch launches in earnest, this will be good for gold. Equivalent to a pivot!
Will the Fed slow the rate of increase?
Şahin Fed’s interest rate hikes hit the gold and cryptocurrency markets badly. The Bitcoin and altcoin market, where liquidity flowed during the expansionary monetary policy era, saw a breathless rally. However, the tide turned as the Fed began tightening to contain inflation, which had soared to historic highs. The rise in interest rates also caused a drop in non-yielding gold from over $2,000 to $1,650. That’s why gold and crypto investors are looking forward to the Fed slowing down and stepping back. In a market note, AvaTrade chief market analyst Naeem Aslam highlights:
The start of the golden week was not on stable ground as the bears pulled the rope a little more to their side. The big question that hits the precious metal’s price is, will the Fed slow the rate of rate hikes? The market expects the central bank to raise interest rates by 75 bps at its next meeting. This pushes the US Dollar index (DXY) up. The strength of DXY controls the price of the yellow metal.
Has the gold price bottomed out?
Treasury yields were mixed as DXY rose a bit higher on Tuesday. Analysts say that each affects gold and crypto prices. They note that the Fed rate target rate has changed expectations of where it will be at the end of the year. Chintan Karnani, research director at Insignia Consultants, says there has been an “inverse correlation” between the gold price and the US 10-year bond yield since the Covid pandemic began. He states that this inverse correlation will continue in 2023. Also, Karnani says:
Gold has bottomed or is approaching bottom. Gold also fell less than the rise in DXY. This is a positive sign for 2023.
Meanwhile, markets expect the Fed to increase by 50 bps in December. So some analysts are hoping that the bottom is in, at least for now. According to analysts at Sevens Report Research, the trend for gold is still lower for now. In this context, analysts draw attention to the following:
In fact, once we say the Fed has reached the top of the hawkish, the outlook for gold will likely shift from bearish to neutral (or bullish)
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