There is little the Fed can do to bring down inflation and that will be good for gold - MarketGauge's Mish Schneider
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(Kitco News) - Volatility in the gold market continues to heat up as market expectations surrounding the Federal Reserve's monetary policies shift. However, one market analyst, looking at the bigger picture, said that the precious metal will remain an attractive asset in 2023 as uncertainty dominates financial markets.
In an interview with Kitco News, Michele (Mish) Schneider, director of trading education and research at MarketGauge, said that many investors and economists are trying to use outdated models to define current financial market conditions; however, she added that all they are doing is trying to "fit a square peg in a round hole."
While it has been 40 years since consumers have seen inflation this high, Schneider noted that what makes the current environment different from the 1970s and 1980s is that inflation has become a global problem. It has become much bigger than the Federal Reserve and its monetary policies can handle, she added.
The downtrend in globalization, China's reopening, ongoing geopolitical conflicts, and sovereign debt issues are just a few sparks that will limit what the Federal Reserve can do with the tools it has.
"The classic formula of Fed raises rates, and it breaks the back of inflation, that just won't work anymore. The risk is that the Fed will lose control," she said. "We are watching several sparks that could take inflation and gold to a place where it will catch many people off guard."
Looking at gold prices, Schneider said that she can see the precious metal pushing to $2,000 an ounce this year and potentially reaching $5,000 an ounce in the next couple of years as the world sees a prolonged period of stagflation, an environment of low growth and high inflation.
Schneider said that gold remains an attractive alternative asset and portfolio diversifier because there is no clear path for the global economy,
"Whether it's inflation, stagflation, or even recession, ultimately, chaos is bubbling beneath the surface everywhere," she said. "I don't see any reason why we can't see $2,000 gold this year."
In all the chaos, rising consumer prices remain a significant focus. The Federal Reserve has taken a hard line in its attempt to bring inflation down to 2%, with Chair Jerome Powell reaffirming his stance that the central bank is committed to "getting the job done."
Schneider's bullish outlook on gold comes as the market has seen a sharp selloff following its best start to the year in a decade. Gold prices have fallen sharply under $1,900 an ounce as there are growing expectations that a hot U.S. labor market will force the Federal Reserve to maintain its aggressive stance.
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April gold futures last traded at $1,878.20 an ounce, relatively unchanged on the day.
Last week the Federal Reserve raised interest rates an expected 25 basis points, accumulatively raising the Fed Funds rate 450 basis points in this tightening cycle.
However, Schneider said that because so many pension plans are heavily invested in bonds, and government debt is so high, the Federal Reserve is limited in what it can do. Long-term, Schneider said that the U.S. central bank probably has room to push the Fed Funds rate to 5%.
At the same time, global demand for raw commodities, specifical food and energy, is expected to remain elevated through the year, which will create some pressure on domestic markets. She added that this environment remains bullish for gold.
Although gold has seen a significant drop from its recent nine-month highs, Schneider said that the correction could attract new investors to the marketplace. She noted that despite gold's more than 20% run from its November two-year lows, investors were still significantly underinvested in the precious metal.
While current prices present a good entry point, Schneider said that investors could also look to buy the break out at $2,000 an ounce. She noted that a break of that level would probably lead to a significant push to $3,000.
"I think you should always have a core position in gold and actively trade around it. Gold is a real hard asset and globally has value when nothing else does," she said.