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Holding 10% in gold makes sense as inflation picks up – iTrustCapital

Kitco News

Look for gold prices to continue to move higher as the Federal Reserve will do everything to fight deflation risks, according to one economist.

Wednesday, the Federal Reserve signaled through its latest economic projections that it expects to keep interest rates at the zero-bound range through 2022.

In an interview with Kitco News ahead of the Federal Reserve’s monetary policy announcement, Tim Shaler, chief economist at iTrustCapital, said that he couldn’t state enough the risks deflation poses for the U.S. and global economy.

He explained that in the housing market, consumers won’t take out mortgages if they fear that the value of their homes will go down; at the same time banks will be reluctant to loan to consumers buying depreciating assets.

“My thesis for thinking that gold makes sense within a portfolio rests on this idea that the Federal Reserve will choose to overshoot, rather than risk deflation. The risk of inflation is far more palatable than any deflation,” he said. “If somebody is concerned about future inflation, then gold is an appropriate part of somebody's portfolio.”

Shaler added that gold prices could struggle in the near-term as investors’ sentiment improves with the hope that the U.S. economy will see a “V”-shaped recovery; however, he added that although the labor market has improved from April’s lows, it still has a long way to go to getting back to pre-pandemic levels.

“The idea that we are going to get 21 million people back to work quickly, I think the jury's out on that,” he said.

Looking at gold’s role in a portfolio, Shaler said each individual investor’s exposure to the precious metal is going to depend on their investment goals. He added that a young family that is looking to buy a house should hold no gold as they save money for a down payment.

However, he added that for long-term investors, he said that holding 10% of your portfolio in gold makes a lot of sense in the current environment.

“A 10% allocation to gold makes a lot of sense because gold has a very low correlation to the overall stock market and to the overall bond market and how portfolios decrease risk at a given return expectation,” he said. “10% is enough to create a low, a correlation factor within your portfolio, but it's not so high that it introduces new risk caused by fluctuations in the gold market itself.”

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.