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Inflation pressures to drive gold prices to $2,000 as Federal Reserve holds the dovish line - Aberdeen Standard Investments

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(Kitco News) -The gold market's recent break above $1,800 an ounce could be the start of a more significant move through the second half of the year that could push prices back to $2,000, according to one market analyst.

Gold is attracting attention as a hedge against inflation, but Steven Dunn, head of exchange-traded products at Aberdeen Standard Investments, said in an interview with Kitco News that it also remains an important diversifier as volatility heads up in over-priced equity markets.

"Gold has not yet seen its best days in 2021," he said. "I have always expected that the second half of the year would be a lot more interesting for gold and maybe we are starting to see that play out a few months early."

Dunn's bullish outlook for gold comes as investors look for prices to push above its 200-day moving average, which comes in around the $1,850 level. Dunn said that the inflation debate is holding the gold market back a little bit because investors and the Federal Reserve don't have a clear picture of the looming inflation threat.

This week markets saw annual U.S. CPI rise 4.2% last month, its biggest increase in 13 years. Meanwhile, on Thursday, U.S. producer prices rose 6.2% for the year, the biggest increase on record.

Dunn said that although inflation is heating up, it's still unclear if it's episodic because the COVID-19 pandemic is still impacting the global supply chain. Or are price pressures going to be more pervasive as unprecedented demand continues to drive commodity prices higher?

Dunn added that rising inflation pressures are putting the Federal Reserve in a difficult position.

"Clearly, there is inflation and if you allow it to run too long, then it becomes a really big problem," he said.

However, Dunn said that he thinks any move to tighten rates before the end of this year would be premature and could shock the markets.

"The Federal Reserve is going to remain as cautious as possible, for as long as possible. That will be positive for gold," he said.

The inflation story is just one fundamental pillar of support for gold in the current environment. Dunn said that if hawkish comments from the U.S. central bank start to creep into the marketplace, he would expect to see significant volatility in equity markets. He added that gold would look attractive as an important diversifier.

"In the start of the year, investors have been taking on risk, which makes sense with the strong economic growth. But now they are starting to remember the importance of wealth preservation of and they are paying more attention to real assets like real estate and gold."

It's also not just gold that investors have to choose from. Dunn said that he is also extremely bullish on platinum and silver. Those metals continue to see solid industrial demand and benefit from the global push to generate clean, renewable energy, he added.

"When we look at the [electric vehicle] market and the upgrades needed for the electrical gold, silver is almost going to be seen as a critical metal," he said.

As to how investors should structure their precious metal portfolio, although silver and platinum are expected to outperform this year, Dunn said that investors should still maintain a core long-term position in gold.

"For investors who sold their gold in the first quarter, I think it now makes sense for them to reestablish a strategic position for the second half of the year," he said. "Now is the time to protect yourself against what could be a lot of froth in the marketplace."

At the same time, Dunn added that investors should also have a position in silver as industrial demand continues to benefit from the global economic recovery.

"Gold will do well this year, but silver will continue to break away as industrial demand becomes a bigger story," he said.

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