'The Fed is in its eighth inning' and inflation is not going down, and that will drive gold higher, MKS' Nicky Shiels
(Kitco News) - Inflation remains the biggest threat to investors and it's unlikely the Federal Reserve will be able to get it back under control even if it continues to aggressively raise interest rates. This will be a positive environment for gold, according to one market analyst.
In her presentation at the annual 2023 Prospectors & Developers Association of Canada, Nicky Shiels, head of metals strategy at MKS PAMP, reaffirmed her view that gold prices will average the year around $1,880 an ounce; however, she also underscored the upside potential for gold as investors look to protect their wealth.
With inflation expected to remain elevated for the foreseeable future, Shiels said that she expects investors to start reevaluating the traditional 60/40 portfolio. She noted that last year was the worst performance for stocks and bonds since 1930. While it's unlikely that stocks and bonds will repeat last year's disastrous performance, Shiels said investors should expect to see significant returns as inflation continues to erode real wealth.
"2022 forced investors to rethink what their portfolio should look like," she said. "We see real assets playing a bigger role in portfolios as an inflation hedge and gold will have a role to play."
Shiels said that gold is attractive because it's not a traditional commodity and doesn't respond to fundamental supply and demand factors.
"I see gold as a monetary asset. You hold gold when everything goes wrong. You don't look at it through a supply and demand lens; you look at it as a fear gauge," she said.
In exclusive comments to Kitco News, on the sidelines of PDAC, Shiels added that gold will never be the "in vogue" commodity," but remains an attractive strategic asset.
"Gold is there when you need it," she said.
Shiels noted that investor exposure to gold is about one-third of what it was from the highs in the early 2000s. She added that it wouldn't take much new interest in gold to impact prices.
As to what gets investors back into the precious metal, she said it will take more clarity from the Federal Reserve.
The comments come ahead of Federal Reserve Chair Jerome Powell's two-day testimony before Congress. Although Powell is expected to maintain a hawkish tone and support the central bank's ongoing aggressive monetary policies as inflation remains well above the 2% target, Shiels said that she sees little the Fed can do.
"Whether interest rates go to 5% or 6%, the Fed is in its eighth inning and that is the kicker for gold," she said.
In comments to Kitco, Shiels said Federal Reserve needs to pick its battle: either fight inflation or make sure the economy doesn't fall into a recession.
"They need to pick one because they can't do both," she said.
Shiels added that she doesn't expect the U.S. central bank will be able to get inflation back to 2%. "Something will break before they get inflation down."
While the U.S. economy has been relatively resilient in this tightening cycle, Shiels warned that consumers haven't felt the full impact of higher interest rates. She added that with the lag effect on monetary policy, consumers will start to feel the true impact around the summer.