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Gold Will Do Well With Fed Focused On 'Symmetric' Inflation - Axel Merk

Kitco News

(Kitco News) - Although interest rates are expected to move higher in June, one fund manager said that the currency environment is still positive for gold as the Federal Reserve has no intention of getting in front of inflation pressures.

For gold investors, the key phrase from the Fed’s statement on Wednesday should have been: “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term,” Axel Merk, chief investment officer and president of Merk Investments, told Kitco News in an interview focused on the Fed’s monetary policy decision.

“The committee is emphasizing that it is okay if inflation rises above its 2% target,” Merk said. “This is a strong indication that the Fed doesn’t believe it has to get ahead of inflation. I think gold will do well in this environment.”

Merk’s comments come as gold has managed to bounce off its recent four-month lows but still remain at the bottom end of its current trading range. June gold futures last traded at $1,315.60 an ounce, up 0.76% on the day.

Merk explained that rising inflation pressures will ultimately keep real interest rates low even as nominal rates rise. Gold can benefit in this environment because as a non-yielding asset it has relatively low opportunity costs.

“It’s not like there is going to be runaway inflation, but in a context of valuation, gold is worth considering compared to other assets,” he said.

But, interest rates are only one part of the investment argument for gold. Merk said that he also likes the yellow metal in an environment of falling equity markets. He added that investors are starting to realize that equities are becoming expensive as volatility rises.

While rising inflation is long-term bullish for gold, Merk said that investors still need to be careful of short-term impact, which is also a stronger U.S. dollar. A recent surge in momentum, which has pushed the U.S. Dollar Index to a new 2018 high, has been the biggest weight on gold prices.

However, Merk said that current currency market moves are just short-term noise.  He added that in the long term, he still sees potential for the euro to rise against the U.S. dollar as the European Central Bank will be forced to tighten monetary policy.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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