Gold's 'currency' is its safety but prices are still 'overvalued' in the short-term, says Pimco
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(Kitco News) Gold has a broad appeal as investors value its safety and security, but prices are still overvalued despite May's losses, according to Pimco managing director Greg Sharenow.
Gold is a 25-year duration asset, Sharenow told Bloomberg. And the long-term outlook for the precious metal remains bullish as central banks continue to increase their allocations into gold, diversifying away from the U.S. dollar assets.
Sharenow said there had been a "tremendous amount of interest" from central banks, and the record-level buying has helped gold prices move higher.
"The safety and security of gold right now have a high currency to them," he said, "A lot of countries are questioning their dollar reserves."
However, the outlook is more bearish in the short term, with the Federal Reserve's monetary policy action being the number one unknown.
"The biggest challenge one has right now is to figure out the lagged effects of any credit tightening that is coming from some of the central banks," said Sharenow. "The uncertainty band still remains fairly wide."
With inflation remaining well above the Fed's target of 2%, the U.S. central bank won't be able to cut rates easily, which will weigh on the precious metal, Sharenow pointed out.
And after dropping for the first time in three months in May, gold could have more ground to lose. Gold is "modestly over-valued" when compared with government bonds, which are inflation-linked, Sharenow said.
Despite the selloff in May, gold is still up more than 9% year-to-date, with investors again anticipating a Fed pause at the June 13-14 meeting.
At the time of writing, August Comex futures were trading at $1,999.90, up 0.90% on the day.
Pimco projects that real bond yields will remain higher for longer, putting downward pressure on non-interest-bearing gold. Sharenow also does not rule out another rate hike before the tightening cycle ends.