There is enough money in the system to resolve the global supply crunch gold to remain stuck in neutral - USBWM
In a telephone interview with Kitco News, Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said that the global supply crunch is the most significant factor pushing inflation to levels not seen in 30 years. However, he added that these issues can be resolved as the global economy recovers from the COVID-19 pandemic.
He added that even with the Federal Reserve reducing its monthly bond purchase and looking to tighten interest rates next year, there is enough money in global financial markets to fix the current supply constraints.
"Looking at inflation, our base case is right is: 'This too shall pass,'" said Haworth. "There's incentives and profit to be made for people to resolve the supply constraints."
However, while inflation won't remain at levels not seen since the early 1990s, Haworth said he does not expect prices pressures to fall back to pre-pandemic levels. He added that he could see inflation averaging 3% for the foreseeable future. He also added that this isn't enough to rerail the current economic recovery.
"As long as businesses maintain their pricing power and consumers can keep spending, there's a scenario where you stay in a slightly higher inflation regime, but that is manageable," he said.
In U.S Bank's base case scenario, Haworth said that bond yields could push higher off their record lows, which in turn would strengthen the U.S. dollar, creating headwinds for the gold market.
Although Haworth said that his expectations are for inflation to moderate, he added that there is a lot of uncertainty in the marketplace, which could be bullish for precious metals.
If supply chain disruptions continue to drive inflation pressures higher, than Haworth said that would drive consumer spending down, lowering economic growth, creating a stagflationary environment.
"While stagflation isn't our base case, the problem we have right now is that all these tail risks are not non-zero probabilities," he said.
With so much uncertainty, Haworth said that investors should be looking to diversify their portfolios. He added that the problem with gold is that unless there is stagflation, investment demand will remain lackluster.
"The challenge for gold is that you're waiting for price appreciation, from a smaller number of the scenarios. So how much do you really put in these tail risks?" he said. "We don't have enough information to evaluate the situation as it, as it moves on."
Haworth said that they still prefer to be invested in large-cap equities and real assets like real estate.
"Historically, equities continue to do well in the environment we see, but you have to think about who's got pricing power," he said.