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U.S. equity markets pricing in perfection so hold some gold - London Capital Group

Kitco News

U.S. equity markets are pricing in perfection when it comes to a potential economic recovery from a world devastated by the COVID-19 pandemic. However, according to one market analyst that optimism could be misplaced as there is still a lot unknown about the virus.

In an interview with Kitco News, Jasper Lawler, head of research at the London Capital Group, said that markets are ignoring economic fundamentals and instead are being driven by the massive liquidity injections from the Federal Reserve and the U.S. Federal Government. He added that in this environment, it makes sense to hold some gold.

Lawler said that he thinks central bank liquidity has gone as far as it can go and that might make it difficult for equity markets to push higher.

"I think the next stage of gains in the stock market are going to be a lot harder work because it's going to be more as a result of real expectations for the economy," he said.

Although Lawler said that he doesn't expect the Federal Reserve to introduce negative interest rates, he does see one more potential card they can play: direct currency intervention to weaken the U.S. dollar.

"If you make that assumption that negative interest rates don't work and they are not going to choose that option, then you have to start to look around, at what else is there in that rather empty looking toolbox," he said.

Looking at gold prices, Lawler said that although the precious metal is seen as an inflation hedge, he sees it more of a hedge against portfolio risk. He added that he expects to see all-time-highs by the end of the year as the current consolidation phase, around $1,700 an ounce, comes to an end.

"It seemed clear to me at the start of the year, and it still seems very clear to me now that there's a lot of risk out there in the market. Whether you believe stock market's heading higher or not… it still just makes so much sense to have gold in your portfolio."

Not only does Lawler see strong investment demand for gold, but he also expects that central banks will continue to increase their reserves of the precious metal to diversify their holdings.

"There's a lot of logic for investors and central banks, I think, to keep increasing their gold positions just purely to diversify away from some of these traditional assets," he said.

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.