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Dovish Or Hawkish Fed? Gold Should Win The Day - VanEck

Kitco News

(Kitco News) - Next week the Federal Reserve will hold its first monetary policy meeting of the year and gold could benefit no matter what action the central bank takes, according to one gold market analyst.

In a recent commentary, Joe Foster, portfolio manager and strategist for VanEck’s gold and precious metals strategy, said that he sees two scenarios playing out next week.

The first is where the U.S. central bank maintains its hawkish stance, which could potentially drive the U.S. economy into a recession.

“This may bring increased financial risks from highly-indebted governments and corporates,” he said.

The second scenario is where the Federal Reserve takes a dovish stance and pauses its monetary policy tightening.

“This would likely bring U.S. dollar weakness,” he said. “Both scenarios would be favorable for gold.”

Foster’s comments come as central bank committee members, including Federal Reserve Chair Jerome Powell, have signaled a more dovish stance on monetary policy since raising interest rates in December and signaling two rate hikes in 2019.

Following last month’s rate hike, Powell reiterated that the because of low inflation pressures, U.S. central bank can be patient with hikes to see how U.S. economic growth evolves.

“The stock market, crude oil, bonds, and President Trump all signaled that Fed Chairman Jerome Powell had made a grave mistake by indicating more rate increases to come in 2019,” he said. “We also believe that the Fed made a serious mistake, but we think the blame should be placed on Mr. Powell’s predecessors, who waited far too long to normalize monetary policy. Now the Fed is tasked with normalizing rates late in the cycle, and it is rapidly running out of time.”

Next week’s monetary policy meeting could set the stage for monetary policy action in 2019 as it will be a live meeting. As announced last year, every monetary policy decision will now be followed by a press conference.

According to the CME FedWatch Tool, markets are not pricing in any tightening in monetary policy next week. For the year, markets see less than a 25% chance of one rate hike. However, many economists are pricing in one hike sometime in the second half of the year.

In his commentary, Foster said that his firm sees the U.S. falling into a recession by the end of the year and while equities are expected to enter a bear market, he does not see markets crashing as they did during the 2008 financial crisis.

“However, there has been asset price inflation in stocks, bonds, real estate, and other asset classes. In totality, this has possibly created the largest asset bubble in history, but without mania psychology, a crash is less likely in our view,” he said. “An added risk in this cycle is an explosion of sovereign debt. This may bring a policy response from central banks in a downturn that distorts and drives markets, but we believe it is unlikely to precipitate a crash, especially with a more stable post-crisis banking system. Gold investments may see less volatility in a crash-less downturn.”

In the current environment, Foster said that he sees the potential for gold prices to test long-term resistance at $1,365 an ounce.

“If the markets are seeing enough systemic risks to move gold through this level, we believe it should be a very good year for investors in gold and gold stocks,” he said.

Although gold has managed to hold critical near-term support levels, prices have struggled to find the momentum to break key psychological resistance at $1,300 an ounce. February gold futures last traded at $1,283.30 an ounce, nearly unchanged on the day.

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.