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Gold price has room to move higher, but investors need to be tactical as inflation pressures won't last - Invesco

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(Kitco News) - Although the looming inflation threat is not expected to be permanent, one fund manager said that there is still an argument to be made to have a tactical investment in precious metals for the next six to 12 months.

In an interview with Kitco News, Kristina Hooper, head of investment strategy at Invesco, said that it is not surprising to see the current significant rise in inflation because of the strong economic recovery. She noted that the economy is benefiting from strong fiscal stimulus and ultra-loose monetary policies.

"We are seeing a perfect storm, in the best sense of the word, for economic growth," she said. "Inflation is expected to pick up as supply will struggle to keep up with demand."

Thursday, the U.S. Labor Department said its U.S. Consumer Price Index rose 0.5% for the year in May, the biggest rise in annual inflation since August 2008. At the same time, core inflation, which strips out food and energy prices, saw an annual increase of 3.8%, the largest 12-month increase since the period ending June 1992

While inflation is heating up, Hooper said that she does not expect inflation due to strong economic conditions to be persistent. She explained that inflation could remain high for the next six to 12 months as the economy continues to digest this new burst of consumer spending.

"I think that we're going to see spending normalized within the next year," she said. "Let's think about it from a consumer's perspective. How many trips can you go on once the economy reopens? How many haircuts are you going to get?"

Hooper highlighted the labor market as an important example of transient inflation. Last week the U.S. Labor Department said that wage inflation grew 0.5% in May, following a 0.7% rise in April. However, Hooper noted anecdotal evidence from the Fed shows that wages are rising in part due to labor shortages caused by some workers staying at home because they can't find or afford childcare services.

As schools reopen, more workers will reenter the workforce, and that should bring wages back down, she said.

Although the inflation threat is not expected to last, Hooper said that there is still an investment case for gold. She added that the precious metal continues to be an important long-term diversifier within a portfolio. At the same time, there is also an argument to be made for gold to be an important tactical investment because of inflation.

"We're in the thick of inflation fears and that's not going to change tomorrow. So there is a catalyst for gold prices to move higher," she said. "Gold has the legs to move higher."

Along with gold, Hooper said that exposure to a broad-basked of commodities like copper and silver also makes sense for investors to protect themselves against inflation. She also added that inflation-protected bonds (TIPS) are an important asset in this current environment.

Not only is gold benefiting from rising inflation, but real interest rates remain in historically low negative territory because of the Federal Reserve's ultra-loose monetary policies.

Although some central bank officials are talking about potentially reducing the Federal Reserve's bond-purchasing program, Hooper said that they will be in no hurry to enact any comments. She added that she expects the central bank is testing markets with the current comments. She liked the environment to putting a frog in water and slowly turning up the heat.

"The Fed wants to be transparent, and they want to saturate markets with comments about tapering, so it becomes commonplace and that investors will essentially be accepted," she said. "The goal is to not have any surprises."

Ultimately, however, Hooper said that the central bank will be behind the inflation curve for the foreseeable future, and that will be positive for gold and silver.

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.