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Is this time to buy? Gold price down 4% as investors panic - State Street Global Advisors

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(Kitco News) - The Federal Reserve has created some panic selling in the precious metal markets after its economic projections Wednesday showed the potential for two rate hikes in 2023. However, one market strategist said that investors are overreacting to the estimates.

George Milling-Stanley, chief gold strategist at State Street Global Advisors, said investors have nothing to fear from the Federal Reserve and shouldn't pay too much attention to projections that are two years away.

Federal Reserve Chair Jerome Powell also warned markets and investors that the forecasts should be taken with a significant grain of salt during his press conference.

"I'm looking at the gold market right now and I think this could prove to be a good time to buy," Milling-Stanley said. "I see a lot of panic selling and I don't think that can last much longer. Basically, the markets saw higher inflation and higher interest rates, but they completely ignored the fact that the hikes are at least two years away. A lot can happen in two years."

Milling-Stanley added that once this wave of panic selling ends, gold will still be in a good position to push back up above $1,900 an ounce and take a run at the record highs above $2,000 an ounce by the end of the year.

The comments come as gold prices lost significant ground since Wednesday's Federal Reserve monetary policy meeting. August gold futures last traded at $1,780.40 an ounce, down more than 4% on the day.

Milling-Stanley said that a lot of the Fed's projections depend on what happens with inflation. He explained that the Federal Reserve is not convinced that higher inflation will be permanent. Milling-Stanley added that if inflation falls back to between 2% and 3%, the central bank will be in no hurry to raise interest rates.

"I think the only thing that will prove to be transitory will be this correction in the gold price," he said.

Milling-Stanley said that he is also not convinced that the recent rise in inflation will be sustainable. He added that the economy is recovering from an unprecedented event. There are no models that can accurately predict what will come next.

"I think the inflation data we have seen as been an outlier as we see demand start to come back. People are rushing out and spending money. They are doing the things they couldn't in the last 18 months," he said. "I think that that will taper off quite quickly."

Although the economy continues to recover from the devastating effects of the COVID-19 pandemic, Milling-Stanley said that he doesn't see signs that the economy is overheating.

However, Milling-Stanley added that if inflation does prove to be stickier than expected and the Federal Reserve is forced to raise interest rates, gold could still prove to be an attractive investment asset. He added that the important factor investors need to pay attention to is real interest rates. If the Federal Reserve is forced to hike interest rates, it means that inflation would be holding at least around 5%.

"Even if inflation does continue to rise, the Fed projections point to only a 50-basis point rise. Real interest rates will remain nearly historically negative lows," he said.

"Look back at the last 50 years, when inflation has been above 5% a year, the average return on gold has been over 16%," he added.

Milling-Stanley said that even if the Federal Reserve does begin a new rate hike cycle two years from now, gold can still perform well.

"The last time that the fed was actually in a rate tightening mode was between December of 2015 and December of 2018," he said. "So gold should have gone down. But it went from $1,050 in December of 2015 to $1,270 by December of 2018. So gold went up 21% in those three years, even though rates were raised nine times."

Milling-Stanley said that he also doesn't see the Fed raising interest rates as the U.S. government continues to push its ambitious spending programs. President Joe Biden is pushing a $6 trillion spending program to rebuild the nation's infrastructure, improve health care and reduce social inequality.

"We still have a Democratic agenda on steroids, and that is going to be expensive," he said. "The deficit will continue to rise, and that will mean interest rates have to stay low. The U.S. dollar will weaken, and that is a good environment for gold."

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