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A giant grain of salt

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(Kitco News) - The gold market is seeing its worst weekly selloff since March 2020, when financial markets were roiled at the start of the COVID-19 pandemic as the global economy grounded to a halt.

This week's panic selling came after the Federal Reserve's monetary policy meeting and the release of their updated economic projections. I wasn't surprised that gold sold off after the central bank meeting. However, the magnitude of the collapse was definitely jaw-dropping.

I understand markets are a little bit jittery when it comes to U.S. monetary policy, as many economists and market analysts expect the Federal Reserve to start tapering its monthly bond-purchase program by the end of the year. However, a $100 drop in gold because the Federal Reserve could potentially raise interest rates by 50 basis points in two years feels to me like an exaggerated move.

Even Federal Reserve Chair Jerome Powell said that markets shouldn't put too much stock in the central bank's interest rate projections. His exact quote was that these forecasts should be taken with a "big grain of salt."

If the head of the Federal Reserve has no faith in these projections, then why should markets? While the gold market could continue to languish below $1,800 an ounce for a little while longer, it is interesting that there is still a strong bullish sentiment in the marketplace.

Many analysts Kitco News has talked to since Wednesday have said that they see this correction as a buying opportunity since nothing has really changed, even with the central bank's latest hawkish news.

"I think the only thing that will prove to be transitory will be this correction in the gold price," said George-Milling Stanley, chief gold strategist at State Street Global Advisors, in a recent interview with Kitco News.

German-based Commerzbank is also expecting to see gold prices bounce back from this selloff, and they continue to see gold prices pushing back to $2,000 an ounce by the end of the year.

"Admittedly, the combination of a noticeably firmer U.S. dollar and higher yields poses quite a burden for gold. Whether it justifies a price slide on this scale is another matter, however. After all, gold had already fallen in recent days in anticipation of a possible change in direction on the part of the Fed," said Commerzbank analyst Carsten Fritsch in a report Thursday. "Rate hikes in two years' time are too far off to warrant any such slump in price, especially as yields are well below the expected rate of inflation."

I do think this correction could prove to be an interesting turning point in the gold market. We will now see how much conviction investors have when it comes to protecting their wealth in a rising inflationary environment.

While a lot of focus has been put on potential two rate hikes by 2023, they have also ignored the fact that the Fed raised its inflation expectations by an entire percentage point.

Interest rates aren't going anywhere soon, and inflation will continue to rise, and that means real interest rates will remain in historically low negative territory for the foreseeable future. Despite all the new volatility, this is still a perfect environment for gold. We just have to get through this panic.

Finally, let's not forget that the U.S. government is still pushing its $6 trillion spending plan. There is no way the Federal Reserve can materially raise interest rates if the U.S. government continues to spend.

Just a heads up to our readers. The next newsletter will be published July 9.

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.