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Investors need to stop focusing on monetary policy, diversify risky portfolios with gold - State Street Global Advisors

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(Kitco News) - Although gold prices are testing an important support level, the market appears to be taking a hawkish shift from the Federal Reserve in stride, indicating that further downside in the price could be limited, according to one market strategist.

In a telephone interview with Kitco News, George Milling Stanley, chief gold strategist at State Street Global Advisors, said he sees the recent price action following the Federal Reserve Monetary policy statement as positive.

Wednesday, the Federal Reserve signaled it could release its plan to reduce its monthly bond purchases in November and start tapering in December. At the same time, a shift in interest rate projections, also known as the dot plots, indicated that the U.S. central bank could raise interest rates by December 2022. The projections also show that interest rates could rise to 1% by the end of 2023.

Milling-Stanley pointed out that in June, when the Federal Reserve first signal rate hikes on the horizon, gold prices dropped $100. Following the latest monetary policy meeting, gold prices are down but holding support around $1,750 an ounce.

"I'm encouraged by the price action because maybe the markets are getting more comfortable with the Federal Reserve's monetary policy," he said.

Milling-Stanley added that generally, gold investors are too focused on monetary policy and interest rates.

"The gold market is more than just where interest rates are going," he said. "Historically, the two promises gold makes in a portfolio is to improve your returns and reduce your risks. Right now, investors should focus on gold's ability to reduce risk in your portfolio."

One major factor working against gold has been the continued unprecedented rise in equity markets. Milling-Stanley said that the S&P 500, Dow Jones Industrial Average have pushed to record highs on nearly a daily basis for most of 2020.

The rally in equity markets comes as the global economy faces to looming risks. Some market analysts that a potential default from Evergrande, a prominent Chinese property developer, could ignite a global liquidity crisis. The company is $300 billion in debt. It will potentially have to pay nearly $1 billion in interest payments in the next three months. Currently, the company has a 30-day grace period to pay $85 million, which was due Thursday.

Meanwhile, U.S. officials continue to sound the alarm that the government is running out of money to meet its obligations.

In an opinion piece in Sunday's Wall Street Journal, Treasury Secretary Janet Yellen appealed to Congress, urging U.S. lawmakers to raise the debt ceiling. She estimates the government will run out of money in October.

"Investors are clearly in a risk-off mood, but there is still plenty of uncertainty out there to be worried about," said Milling-Stanley. "Equities are a risk asset. There's no question about that. And I think it would be a good idea for investors to recognize that. People piling into risk-on assets like equities at the current pace is a disturbing phenomenon."

Milling-Stanley said that for anyone who is worried about the valuations in equity markets, now is the time to diversify their assets.

"You need to protect yourself when you are vulnerable and right now equities are vulnerable," he said. "If you look back at past financial crises, one of the primary causes in some cases, has been the underestimation of risk."

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.