(Kitco News) - The gold market remains in a healthy position even as the Federal Reserve looks to raise interest rates to nearly 3.5% this year and potentially to 4% next year, according to one market analyst.
In an interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said that he is not surprised that gold has held up well following the Federal Reserve's decision to raise interest rates by 75 basis points, the biggest move in 28 years.
The Federal Reserve was prompted to aggressively tighten monetary policy as inflation hit another 40-year high at 8.6% last month. However, Milling-Stanley said that gold investors are starting to recognize that the U.S. central bank and its leader Jerome Powell is in a very precarious position.
"The Federal Reserve is walking a very narrow tightrope," he said. "Powell wants to choke off some demand issues to bring down inflation, but he doesn't want to push the economy into a recession."
Milling-Stanley added that ultimately, either decision the Fed makes will be positive for gold. "If The Fed doesn't raise interest rates fast enough, then inflation will continue to rise and if they move too fast, they risk a recession. Both of these scenarios are positive for gold. Either way, gold investors win."
The rising risks to the U.S. economy were also reflected in the Federal Reserve's latest economic projections. The U.S. central bank sees U.S. GDP growing 1.7% in the next two years, down sharply from their previous GDP forecast of 2.8% and 2.2%, respectively.
Although the Federal Reserve's aggressive monetary policy stance will start to drive real yields higher, a negative headwind for gold as a nonyielding asset, Milling-Stanley said that investors need to stay focused on the larger landscape.
He added that real interest rates wouldn't be high enough to offer investors significant protection from rising volatility and economic uncertainty. He said that research shows real yields need to get above 2% before it presents a problem for gold investors.
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"We are still a long way from where yields need to be that will spook investors," he said.
Aside from low-interest rates, Milling-Stanley said that gold will continue to be an important portfolio diversifier as both equity and bond markets sell-off. While gold has held its ground following the Federal Reserve's 75-basis point move, the S&P has seen significant weakness falling more than 3% Thursday.
Gold prices are relatively unchanged on the year, while the S&P 500 has dropped more than 23%, falling into the bear market territory.
"Despite rising interest rates, gold is still the best defensive asset that investors need," he said. "Gold can answer a lot of the questions that investors are currently asking themselves and their advisors."
As to how much gold an investor should hold in their portfolio, Milling-Stanley said that, on average, investors should hold anywhere between 2% and 10% in their portfolio. He added that in "troubled times," research shows that investors should double their exposure up to 20%.
"I'm not saying everybody should go to 20%, but mathematically, that was the optimal level according to our research," he said.
Whether or not we are in turbulent times, Milling-Stanley said that is up to individual investors.
"We have war, we have inflation, we have pestilence," he said. What more would you like, a plague of locusts to convince you that we're in turbulent times?"
