Wilshire wShares increase its allocation to gold sees positive drivers for rest of 2021
(Kitco News) - With gold prices struggling to hold the critical psychological level around $1,800 an ounce, one precious metal investment firm is recommending investors look past the noise and focus on gold's long-term diversification potential.
Guenther explained that although the gold market saw some dramatic price swings last month, the market's average volatility has been relatively stable. The Wilshire gold ETF adjusts its exposure to gold based on the market's average volatility.
"With our algorithms, we are letting the data speak for itself," he said. "One of the key features of the strategy is to keep investors' emotion out of the market and stop them from making potentially irrational decisions."
Although Guenther doesn't know how the fund will rebalance itself in the future, he said that he sees a positive price driver through the rest of the year.
Guenther said that the most significant factor for gold remains rising inflation pressures. In May, U.S. Consumer Price Index rose 5.0% for the year, the biggest jump since August 2008. He added that the magnitude of inflation will continue to support gold through the rest of the year.
"We conducted a study internally and looked at inflation and notice that when the year-over-year inflation was above 3.25%, gold increased almost two-thirds during that same time," he said. "History suggests gold can be a very good inflation hedge."
While rising inflation pressures provide some strong support for gold, many economists note that it is also pressuring the Federal Reserve to potentially tighten its monetary policy sooner rather than later.
Guenther said that while there is a risk that the Federal Reserve does move soon than expected, he doesn't see this as a likely scenario. He added that it is going to take more time to determine if the current inflationary environment is permanent or temporary.
"The Fed has said very clearly that it is data-dependent and right now, they don't have enough data to make any decisions right now," he said.
However, Guenther added that even if the Fed is forced to move early, it doesn't mean it will be a game-changer for gold.
He said that another factor to support gold is its appeal as a safe haven and diversification tool. He noted that at record valuations this late in the business cycle, equity markets are at significant risk of seeing a major correction.
"More than gold, we expect that higher interest rates will have a larger impact on equity market valuations and bond market valuations," he said. "Equity markets are at record levels because money has been very inexpensive for the better part of the last 15 years."