Whatever the Fed's got gold can take it... so far
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(Kitco News) - The gold market is looking to end the week with a 2% loss; however, many precious metals investors see the price action as a major victory with gold standing up to the most aggressive Federal Reserve in nearly 30 years.
With inflation hitting a fresh 40-year high last month the Federal Reserve had no choice but to raise interest rates by 75 basis points this week. At the same time the central bank also signed further aggressive action as it now sees interest rates potentially rising to 3.5% by the end of this year and hitting 4.00% in 2023.
Markets are even pricing in another 75 basis point move next month as Federal Reserve Chair Powell said that inflation remains the biggest threat to the economy.
Despite this hawkish sentiment, gold prices are ending the week just below $1,850 an ounce, which has been a critical psychological level for the past month. Broadly, although gold prices ending the week in negative territory, they continue to outperform equities. The S&P 500 is looking at a weekly loss of 5% as it falls deeper into bear-market territory.
Gold prices remain relatively unchanged so far this year, while the broad stock market index is down nearly 23%.
Volatility in the marketplace is one significant reason why gold has held its ground in the face of the Federal Reserve's aggressive monetary policy tightening. Inflation continues to rise and the Fed's hawkish stance is raising the risks that the economy falls into a recession.
George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors, told Kitco earlier this year that gold has nothing to fear from the Fed and it is proving right. This week he noted that gold wins no matter what the Fed does.
|Gold hasn't lost its luster even as the Fed continues to raise rates - State Street's George Milling-Stanley|
As to how much gold an investor should own, Milling-Stanley said that research shows that the optimal level of gold in a portfolio is around 10%; during turbulent times that level can double. If these aren't turbulent times then I don't know what is.
Milling-Stanley isn't the only optimistic analysts in the marketplace. Commodity analysts at Societe Generale said that gold prices could push back above $2,000 an ounce in the third quarter.
";We are still supportive in the very near term, as we expect monetary and fiscal policy to tighten, but not as quickly as inflation," the analysts said.
Finally, it appears that the debate between gold and bitcoin as the best store of value has been settled. This has not been a good week for the cryptocurrency markets after Celsius Network announced that it was halting all transactions on its platform. Bitcoin the leading crypto currency is now testing support just above $20,000 an ounce. Bitcoin is down a whopping 55% year-to-date.
Some analysts are expecting further pain in digital currencies as rising interest rates reduces market liquidity.