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Gold has no reason to fear the Fed, so investors shouldn't be betting against it - SSGA's George Milling-Stanley
(Kitco News) - The gold market could see some short-term turbulence as investors might be a little too optimistic when it comes to the Federal Reserve potentially lowering interest rates by the end of the year, according to one market analyst.
In an interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said that while he is bullish on gold through 2023, he is a little worried that investors believe Federal Reserve Chair Jerome Powell"s comments. Powell said Wednesday that rates will remain elevated through the rest of the year to make sure inflation gets down to the central bank"s 2% target.
Powell"s comments came after the Federal Reserve hiked interest rates 25-basis points, in what was a much-anticipated move. Yet markets interpreted Powell"s comments as dovish as he noted inflation pressures were starting to drop.
"It is gratifying to see the disinflationary process now getting underway," Powell said in his press conference following the central bank"s monetary policy decision. "We can now say, for the first time, that the disinflationary process has started. And we see it really in goods prices so far."
While focusing on the disinflation comments, Milling-Stanley said that markets have entirely ignored his other messaging that the Federal Reserve"s job is not done.
" If the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year, to loosen policy this year," Powell said.
Milling-Stanley said market repricing of interest rates could create some selling pressure in gold, especially if the U.S. dollar starts to rally.
"The markets are basically saying that they don't believe Powell, which is very concerning to me," he said. "I'm inclined to believe him when he says what he's going to do."
Although shifting interest rate expectations could create some volatility for gold, Milling-Stanley said that he still remains bullish on the market as rising interest rates will create a worse environment for equity markets.
"Last year, I said that equity markets have more to fear from the Fed than gold, and I think that is still the case," he said. "I think the Fed does push interest rates above 5% this year, but they are going to do it slowly and in small increments. We are past the days when small interest rate increases will drive the dollar high."
In December, Milling-Stanley and his team said that their base case for gold is for prices to trade between $1,600 and $1,900 an ounce. The bullish case for the precious metal was for prices to head back to all-time highs above $2,000 an ounce.
"It is nice to see gold starting the year in our bullish range and I think it"s a very real possibility that we will see $2,000 this year," he said. "Gold's performance last year was actually very respectable. And I'm expecting even better from gold this year."
Not only is the Federal Reserve"s monetary policy unlikely to provide new momentum for the U.S. dollar, but Milling-Stanley added that rising interest rates increase the risk that the U.S. falls into a recession.
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Despite Powell"s optimistic tone Wednesday, Milling-Stanley said that a recession remains a very real risk.
"This whole notion of getting back to 2% inflation with no significant economic decline and no big increase in unemployment may be a little bit of a heroic assumption," he said. "We will have to see a recession in order to get inflation back to that 2% level. You have to hurt the economy to bring inflation down when it's become this embedded."
Milling-Stanley said that he sees a goldilocks environment for gold in 2023. If the Fed does end its tightening cycle early, that will create further weakness in the U.S. dollar, he said. He also added that gold would be an attractive inflation hedge as it would be unlikely that inflation falls back down to 2%.
In the other scenario, a hawkish Fed pushing the economy into a recession would make gold an attractive risk hedge, Milling-Stanley said. Historically gold has seen double-digit returns in recessionary environments.
Looking beyond U.S. monetary policy, Milling-Stanley said there is also enough geopolitical uncertainty to maintain a safe-haven bid in gold through the rest of the year.
Another factor, Milling-Stanley said, that he sees supporting gold through 2023 is central banks" insatiable demand for the precious metal.
Last year central banks purchased 1,136 tonnes of gold last year, the second-highest amount since 1955.
"Those central bank figures were astonishing," he said. "Central Bank is seen as providing solid support for gold prices whenever there is any tendency for some downside in the market."
Milling-Stanley added that he expects central banks will continue to purchase gold for the foreseeable future, even if it's not at the record levels seen last year.
"Emerging markets central banks, on average, have something like two-thirds of their reserves in dollar-denominated assets and less than 5% in gold. And they want to change that ratio. They want fewer dollars and they want more gold," he said.
As to how much gold investors should hold in their portfolio. According to research from the World Gold Council, anywhere between 2% and 10% is an optimal amount of gold in a portfolio. Last year, Milling-Stanley said that investors might want to double their exposure in times of uncertainty.
"Last year, gold served investors well. I know I won"t be reducing my gold allocation at any time this year," he said. "Investors should still be somewhere in the range of between 2% and 20%. I don't think any of the reasons why you held gold last year have gone away in 2023."
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