Investors should diversify away from bonds in 2022, hold 10% in commodities, including gold - WisdomTree
(Kitco News) - The gold market continues to struggle to attract new bullish momentum as some investors worry that the Federal Reserve will be more aggressive than first expected when it comes to monetary policy tightening in 2022.
The gold market continues to feel the effects of last week's sharp selloff after President Joe Biden nominated Jerome Powell to remain as head of the Federal Reserve for another four years. With the nomination in place, some investors are now expecting Powell to be a lot more hawkish in the future.
However, in a recent phone interview with Kitco News, Jeff Weniger, head of equity strategy at WisdomTree, said that investors should look to owning more real assets and fewer bonds in 2022 as rising inflation remains a threat. Weniger added that it doesn't matter who is at the helm of the Federal Reserve because interest rate hikes still won't keep up with inflation.
"The answer to whether or not the Fed is behind the curve is absolutely positively, 100% yes," he said.
Currently, price pressures are being driven by the global supply crunch. While the supply disruption should be fixed in 2022, Weniger said that the global economy will face rising demand, especially for services, as consumers try to resume their normal lives and move on from the COVID-19 pandemic.
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Weniger said that travel data shows that U.S. air traffic is already back to 2019 levels.
"There is a lot of pent-up demand for services, and that is going to be the next inflation threat as the supply chain recovers," he said. "Inflation will still be a problem in 2022, but the pressures will be slightly different."
While inflation is expected to fall from October's 31-year high at 6.2%, Weniger said he still sees it elevated above 4%.
Weniger added that higher inflation will probably force the Federal Reserve to raise interest rates sooner than expected. However, he added that investors need to keep an eye on the bigger picture.
Currently, markets expect the Federal Reserve to raise interest rates by June of 2022 and are pricing in a total of three rate hikes.
"Let's suppose it is the case or that there are even four rate hikes next year. That doesn't preclude commodities from rallying," he said. If you have your money at something like 1% and inflation is running at 3% or 4%, that is still extremely accommodated monetary policy."
In this environment, Weniger said that he is recommending investors take the traditional 60/40 portfolio model and adjust it to add in commodities like gold, silver and oil. He said that investors should look at a portfolio model of 60/30/10.
Weniger added that even if the yield on two-year notes rises to 1.5%, a 200% increase from current levels, the asset is still unattractive.
"It's not appealing for investors or from a return standpoint. The only appeal there is the diversifying effect, but you can get the same thing in commodities," he said. "Commodities are going to the soothing balm for your portfolio if inflation continues to rise."
While stagflation, an environment of rising inflation and lower economic growth, is on the radar for 2022, Weniger said that is not a major scenario they see. He explained that U.S. consumers are spending stockpiled cash and the unemployment rate continues to fall. These factors aren't pointing to slower growth in 2022, he said.
As for equity opportunities, Weniger said that he likes value stocks and would stay away from mag-cap growth stocks.