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The gold price is 12% undervalued as it faces monetary policy headwinds - WisdomTree

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(Kitco News) - The gold market has been a frustrating trade for many investors as the precious metal struggles to find some bullish momentum even as real interest rates remain well entrenched in negative territory.

In an interview with Kitco News, Nitesh Shah, director of research at WisdomTree, said that looking at the U.S. dollar, interest rates, and inflation, gold prices should be trading around $2,000 an ounce.

However, the Federal Reserve's plan to reduce its bond purchases by the end of the year and the potential for an interest rate hike by the end of 2022 could limit gold prices in the future. Shah said that he is forecasting gold prices to push to $1,970 an ounce by the fourth quarter of 2021 and then level off with prices falling back to $1,860 by the second quarter of 2022.

"Gold is facing some difficult headwinds, but it is severely underpriced, and there is a risk that we see an upside correction," he said.

Shah said that one of the reasons gold is struggling to find traction is because investors believe the Federal Reserve's inflation outlook that rising consumer prices will be transitory.

For the gold market, he said, a lot depends on what happens during the September Federal Reserve monetary policy meeting. There are expectations that the Federal Reserve will release a detailed plan on how it will reduce its monthly bond purchases.

However, Shah added that more than just the Fed's tapering plans, their inflation outlook will be an important driver for gold.

"They keep saying inflation is transitory, but how long is transitory?" he said. "They haven't articulated how long the supply bottlenecks are to last. Once the Fed comes up with a clear message, I think gold will start to move and fill the gap."

Shah said that many investors, in believing the Fed's inflation outlook could be downplaying the current risks. Although the spike in inflation seen this summer is probably not sustainable, Shah said that inflation is not going back to pre COVID-19 levels.

"We know that the new normal is going to be different to the old normal. The world is never going to go look," he said.

Inflation is going to be a persistent theme, but Shah added that the Fed will be limited on how high it can raise interest rates.

 "You are never going to tackle the inflation problem with rate hikes, apart from if you cause deflation in certain goods, which causes economic harm," he said.

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.