(Kitco News) - The gold market continues to struggle to hold consistent gains above $1,700 an ounce, and while prices have room to move lower through the rest of the year, one market strategist said that the current price represents long-term value for investors.
In an interview with Kitco News, Stephen Land, vice president and portfolio manager of Franklin Templeton's Franklin Gold and Precious Metals Fund, said that gold's current downtrend makes sense as the Federal Reserve continues to aggressively raise interest rates; however, he added looking past the short-term volatility, he remains optimistic on the precious metal.
"I would be cautious on gold heading into the end of the year, but for anyone with a 12-month timeframe, this is a pretty interesting time to be looking at gold as a value play."
Although rising interest rates will continue to weigh on gold prices, Land said investors are starting to question just how much room the central bank has left. Markets expect the U.S. central bank to raise the Fed Funds rate by 75 basis points in November and December and see terminal interest rates rising to 5% in the first half of 2023; however, the Federal Reserve's monetary policy is starting to wreak havoc in global markets, forcing the Bank of Japan and the Bank of England to intervene in their domestic currency and bond markets. Land said that these issues will only continue to grow and could force an early end to the current tightening cycle.
"The Fed's action is exporting a lot of inflation from the U.S. and is putting a lot of that burden on other countries. At some point, that is going to cause some geopolitical issues that will impact the U.S.," he said. "The Fed is making the right moves based on the domestic data, but they are aware of the impact they are having on the rest of the world."
Land added that because of growing geopolitical uncertainty, the Federal Reserve is unlikely to raise interest rates high enough to bring inflation back down to its 2% target.
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| Solid physical demand for gold and silver tells you where prices are going in the long term - LBMA |
"The Federal Reserve doesn't entirely have control over inflation and as rates start to slow, the case for gold and its role as an inflation hedge becomes a little clearer," he said.
Land added that in the current environment, the Fed doesn't even need a full pivot on monetary policy to attract new bullish momentum in gold. If the U.S. central bank just stops raising rates, that would be enough to end gold's downtrend, he said.
Although investors will have to wait a little longer before the U.S. central bank ends its current tightening cycle, Land said there are still great opportunities in the precious metals sector.
He added that gold prices holding above $1,650 an ounce still represents solid value for mining companies, citing that, on average, mining companies are seeing profit margins of around $200 an ounce at current prices.
"It's not the same margins we saw at the start of the year, but this is still a robust business," he said. "$1,650 isn't a terrible price compared to what we have seen in the past."
Land noted that the mining sector has underperformed the gold market in the current downtrend. Still, when the market turns, he would expect miners to outperform.
"Now is the time to position yourself for higher gold prices and there is a lot of leverage in mining equities right now," he said.
