Buy the dip; gold prices are going to be a lot higher five years from now - Degussa's Polleit
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(Kitco News) - Investors should be prepared to see higher volatility in the gold market as market expectations contrast sharply with what the Federal Reserve has signaled regarding the future path of interest rates.
However, one market analyst is recommending investors ignore the noise and focus on the broader bullish trend in the marketplace. In an interview with Kitco News, Thorsten Polleit, chief economist at Degussa, said that investors should use any gold price weakness to build a strategic long-term position.
"If you are a long-term investor and looking to hold gold for the next five years, then this price is right," he said. "Looking past the noise, gold prices are going to be a lot higher five years from now.
Polleit's comments come as the gold market holds support above $2,000 an ounce after prices dropped sharply from last week's near-record highs. June gold futures last traded at $2,029.20 an ounce, up 0.20% on the day.
Although gold prices were unable to hit new all-time highs, Polleit said that he still sees gold prices ending the year around $2,200 an ounce. He added that investors just need to be a little patient.
"I'm actually thinking about raising my year-end target because of how gold is acting," he said.
Polleit said that he sees the disparity between market expectations and comments from Federal Reserve Jerome Powell creating some safe-haven demand for gold. He added he has never seen this prolonged gap between what the market has priced in compared to central bank comments.
"Markets are pricing in rate cuts this year because there is a growing mistrust of the forecasting ability of central bankers," he said. "Even if the Fed doesn't cut rates as soon as markets expect, there is still plenty of support for gold because interest rates will be coming down. It's just a matter of when."
Looking ahead, Polleit said he sees the Fed cutting interest rates later in the second half of the year. He added that it's unlikely the central bank will have enough information to cut rates before the summer.
Looking past interest rates and inflation, Polleit said another area where the Federal Reserve and other central banks are losing credibility is regarding the growing banking crisis. Kicking off his press conference, Powell's first comment was that "the banking system is sound and resilient." However, this was just days after First Republic was the latest regional bank in the U.S. to collapse.
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Polleit said the Federal Reserve is downplaying the banking crisis to investors' detriment.
"The banking crisis is significant and it's just getting started," he said. "The flow of funds from small and medium-sized banks is real. At the same time, they are seeing higher capital costs. We also haven't seen the full impact of the commercial real estate market."
Polleit said that this uncertain economic environment will continue to push investors to gold. He added that with the bond market struggling along with the U.S. dollar, there are very few safe-haven assets left for investors.
As to what could force gold back below $2,000 an ounce, Polleit said that he doesn't see any of the new trends in the global marketplace, like waning globalization or de-dollarization, changing anytime soon.
"I'm convinced gold and silver are going up as we see further increases in the money supply, lower interest rates and further trouble in the banking sector spilling over into the general economy," he said.