Gold Remains Relevant As Markets Deal With Fed’s ‘Moral Hazard’ – Degussa
(Kitco News) - Investors need to be prepared for when the unprecedented global monetary experiment comes to an end as central banks, in particular the Federal Reserve, move forward normalizing interest rates, according to one international bullion company.
In its latest market report, analysts at Degussa said central banks have created enormous “moral hazard,” in the marketplace as they drove interest rates down to unprecedented lows and loosened monetary policy.
“Central banks around the world, under the leadership of the Fed, have orchestrated yet another artificial boom – which, sooner or later, will falter and turn into bust. This is, by no means, a pessimistic prediction. But it is based on sound economics: A policy of artificially lowered interest and politically distorted prices simply cannot bring about greater prosperity and higher employment in the long run,” the analysts said.
The comments come as markets are pricing in an almost 92% chance that the Fed raises interest rates for a third time this year in December. Degussa noted that investors have shrugged off rising interest rates and tighter monetary policy -- as the Federal Reserve begins to unwind its balance sheet -- because there are expectations that the central bank will quickly reserve course if the economy, and markets start to falter again.
“Investors expect central banks to provide a ‘safety net’. This expectation encourages them to make risky investments again,” they said. “Investors feel pretty much assured that the risk-reward profile of their investments has become more favorable - that they can enjoy a considerable upside, while the downside is limited.”
In this environment of mispriced risk, the analysts note that it is not surprising that gold has struggled to attract investor attention. Lackluster interest in gold has been fairly prevalent as prices have traded in its narrowest range in four years. Gold market volatility is at its lowest level in seven years.
December gold futures last traded at $1,278.70 an ounce, up 0.36% on the day. The precious metal has been caught between its 100-day and 200-day moving averages since mid-October.
Despite, a dull precious metals market, Degussa said that they still see potential for gold and silver. They warn that at some point the central bank monetary experiment will unravel.
“From this viewpoint, we continue to consider gold and silver to be an effective portfolio insurance, currently trading at a rather attractive price,” they said. “If unbacked paper currencies come under pressure… gold and silver would serve as an effective hedge against the downfall.”