Gold prices can go lower, but now is the time to build a strategic position - Incrementum' Ronald-Peter Stöferle
(Kitco News) - Now is the time for investors to look at building a strategic position in the gold market, according to one market strategist, as prices are expected to struggle in the near term due to rising bond yields on the short end of the curve.
In an interview with Kitco News, Ronald-Peter Stöferle, managing partner and fund manager at Incrementum AG and one of the authors of the annual In Gold We Trust report, said that he is expecting to see lower gold prices in the near term as markets begin to price in further aggressive monetary policy action from the Federal Reserve.
Persistently higher inflation has prompted markets to price in a 21% chance that the Federal Reserve will raise interest rates by 50 basis points next month. These shifting expectations have pushed the yield on U.S. two-year notes above 4.6%, its highest level since 2007.
At the same time, the yield on one-year notes is above 5%. Stöferle noted that when looking at inflation expectations, real bond yields are currently seeing positive returns.
"This is a tough environment for gold and I expect to see further downside risks in the next couple of weeks," he said.
The comments come after April gold futures ended last week in neutral territory at around $1,850 an ounce. Markets are closed Monday for the Presidents' Day long weekend.
However, Stöferle added that the gold market continues to show relative strength despite the selling pressure. He explained that he sees the price action and resilient strength in gold as the market calling out central bankers' hawkish rhetoric.
The rise in shorter-term bond yields has pushed the inverted yield curve to its widest level in 40 years. Stöferle said that this market trend indicates that it's only a matter of time before the U.S. falls into a recession and the Federal Reserve is forced to unwind its aggressive tightening.
Stöferle said that he expects that as soon as unemployment starts to rise, the Fed will quickly loosen interest rates.
"In the 2022 In Gold We Trust, we said that central bankers are doves in hawkish clothing and nothing we have seen has changed this view," he said. "As soon as credit markets tighten, there's no way the Fed or any central banker will stay hawkish."
While there is growing optimism in the marketplace that the U.S. can avoid a recession, Stöferle said that many investors have underestimated the time lag in monetary policy. He added that the Federal Reserve has already made its policy mistake and it's only a matter of time before something breaks.
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Not only has the Federal Reserve raised interest rates by 450 basis points this tightening cycle, but it has also reduced its balance sheet by $500 billion. Stöferle said that it's only a matter of time before the economy feels the effects of reduced liquidity in the marketplace.
"It's like being in a room that is losing oxygen. At first, you might not notice anything, but then it gets harder to breathe. Soon, you are rushing to the exits, hoping to get out before it's too late," he said. "Not only is the risk of a recession rising, but I think we could see a major fiscal crisis."
In this environment, Stöferle said that now is the time to take advantage of lower gold prices and build a strategic position ahead of the second half of the year. He added that one strategy investors should look at is building a position through cost averaging, where you look to buy at successively lower prices.
Despite lower prices in the near term, Stöferle said that gold prices are still on track to end the year above $2,000 an ounce.