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Gold's bull versus equities' bear

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(Kitco News) - The Federal Reserve is cliff-walking on a very narrow ledge, and that is making equity investors very nervous; however, the gold market continues to do its job holding steady in volatile waters.

Wednesday, the S&P 500 fell 4% during the session, seeing its worst one-day selloff since June 2020. This week's price action has only added to the ugly picture as equity markets enter a bear market.

Year-to-date, the broad stock market index is down nearly 20% falling well below 4,000 points. In contrast, the gold market is roughly neutral on the year and is clearly the outperforming asset.

According to reports, investors are fleeing equities as inflation takes a bite out of corporate profits. At the same time, the Federal Reserve is looking to cool inflation by slowing down the economy through aggressive rate hikes.

Federal Reserve Chair Powell added to hawkish expectations saying that the central bank will do all it can to make sure inflation pressures start to ease.

"What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down. And if we don't see that, then we'll have to consider moving more aggressively," he said at a Wall Street Journal live event Tuesday.

Because of this stance, some analysts expect that the S&P has room to fall further.

The S&P 500 is just getting started; further declines in equity markets will continue to support gold prices - analysts

"We don't expect the pressure on valuations to ease any time soon. Although headline inflation may have peaked, the Fed is still clearly uncomfortable given how far above target it is, as Jerome Powell emphasized earlier this week. The central bank, in our view, is unlikely to significantly back off from its tightening plans until inflation is much more under control," said Thomas Mathews, markets economist at Capital Economics, in a note Thursday. "In other words, we don't think the "Fed put" will come into effect anytime soon.

And now, the big question investors are asking is if the central bank is setting itself up to make a policy mistake.

In a recent report, Thorsten Polleit, chief economist of Degussa, said that the Fed's plan for a soft landing has been made more difficult as the world continues to grapple with record-high debt. He noted that at the end of 2021, worldwide debt totaled 351% of global GDP.

"The risk that something could go wrong is enormous, especially given record levels of global debt," he said.

The gold market continues to face challenging headwinds from the U.S. dollar; however, analysts have said, gold is once again seeing renewed investor interest as a safe-haven asset. Some see gold's bounce this week below $1,800 an ounce as an indication that the precious metal has found a floor.

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.