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A Fed-induced crisis as it aggressively raises rates will drive gold back to record highs this year - Capitalight's Chantelle Schieven

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(Kitco News) - Gold's ability to hold solid support above $1,800 an ounce could signal that investors doubt the Federal Reserve's ability to bring down inflation, even as Federal Reserve Chair Jerome Powell maintains a hawkish tone.

Following Powell's two-day testimony before Congress, markets now see a growing possibility the U.S. central bank could raise the Fed Funds rate by 50 basis points later this month.  According to the CME FedWatch Tool, markets see a nearly 80% chance of the Federal Reserve making another aggressive rate hike.

In an interview with Kitco News on the sidelines of the 2023 annual Prospectors & Developers Association of Canada, Chantelle Schieven, head of research at Capitalight Research, said that gold's gains in the near term could be limited as rising interest rates pushing real bond yields higher and strengthens the U.S. dollar; however, she added that she continues to expect prices to retest record highs, above $2,000 an ounce, this year or early 2024.

She added that after reviewing Powell's comments, there is a good chance the Federal Reserve will raise interest rates by 50 basis points at the next two meetings.

However, she added that this is not necessarily negative for gold as the U.S. central bank continues to risk pushing the economy into a deep recession.

"The faster you raise interest rates, the faster something is going to give, that something is going to break," she said. "Gold doesn't need a crisis to move higher, but it definitely loves a crisis."

Although gold prices could be capped in the near term, Schieven said that growing recession fears are helping the precious metal find some resilient strength as it builds a solid base of around $1,800 an ounce.

"Just based on where the U.S. dollar is and the rally in U.S. real yields, some modeling would suggest gold prices should be closer to $1,600. The price action we are seeing suggests growing investor interest in gold to hedge against inflation and other risks," she said.

It's also more than just recession risks surging through the marketplace. Schieven said that because debt levels are so high, there is a real possibility the U.S. sees another banking crisis; at the same time, a strong U.S. dollar could precipitate a global sovereign debt crisis.

Either of these scenarios would force the Federal Reserve to reverse its aggressive rate hikes. Although the U.S. economy has held up reasonably well, Schieven said that many consumers and policymakers are downplaying the lagging effects of monetary policy, describing it as a "very blunt instrument."

It can take up to 12 months for the economy to feel the effects of rate hikes, which Schieven pointed out would be in early summer. She added that she would expect a crisis in October would force the Federal Reserve to start cutting interest rates by the end of the year or in early 2024.

"The employment data and some inflation data the Federal Reserve is watching are lagging indicators. We just don't think the labor market is as strong as the data suggests. Also, let's not forget the labor market can very quickly weaken when the economy turns."

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With all of these threats looming on the horizon, Schieven said that it is unlikely the Federal Reserve will be able to get the Federal Funds rate above 6% and it won't be high enough to bring down inflation.

Along with easing monetary policy by the end of the year, Schieven said that she expects the U.S. central bank to raise its inflation target, expecting that they would be comfortable with inflation hovering around 4%.

Schieven's comments come as market chatter has risen recently that the Federal Reserve could raise its inflation target to 3%, up from 2%.

"The demand for green energy, falling globalization and the demand for domestic supply chains are all inflationary and long-term trends that aren't going way," she said. "We don't expect to see lower inflation anytime soon based on the way the world is changing."

Although the gold market could see prices briefly drop through $1,800 an ounce, in the near term, Schieven said that current prices still present solid value if prices rise to record highs this year or early 2024.

The comments come as gold prices hold on to solid gains Thursday. April gold last traded at $1,833.80 an ounce, up 0.84% on the day.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.