(Kitco News) - Expectations that the Federal Reserve could raise interest past 5% this year and maintain its aggressive monetary policy through 2023 are taking its toll on gold, pushing prices to their lowest point so far this year.
However, one market analyst said gold still remains an attractive asset as the global market is bigger than U.S. monetary policy. In an interview with Kitco News, Joy Yang, global head of index product management at MarketVector Indexes, said that gold is struggling because investors and markets are hyper-focused on inflation and ignoring other risks.
Yang noted that although bond yields have risen to multi-year highs, the yield curve remains at its most inverted level in 40 years, a strong recessionary signal. She added that this environment should continue to support higher gold prices.
"There is more to gold than its lack of yield," she said. "Equity market volatility, the threat of a global recession, and geopolitical uncertainty have investors running for the hills and that for me, is where gold shines. It remains an important safe-haven asset."
Yang said that she is optimistic that the U.S. economy can avoid a recession as the Federal Reserve continues to raise interest rates. However, she added that even in this scenario, there is going to be a lot of volatility, and investors should look at diversifying their portfolios, which includes holding precious metals, to protect themselves.
Looking at the broader financial market landscape, Yang said that there is no guarantee that the Federal Reserve will be able to bring inflation down even if they push rates higher. Yang noted growing talk that the central bank could adjust its inflation target and raise it to 3% from 2%.
Yang added that this move would be significant as the central bank would signal that the economy has entered a period of higher inflation. Bringing inflation down to only 3% would mean it wouldn't have to aggressively raise interest rates as much as it has.
"Right now, the Federal Reserve is trying to balance a lot of different factors. We certainly have to be careful of our debt," she said. "Ultimately, the Federal Reserve will be practical and realistic."
Another factor supporting the gold market's long-term bullish case is the ongoing de-dollarization trend. Last year, central banks bought 1,136 tones of gold, the biggest annual purchase on record, going back to the 1950s.
Yang said that she doesn't expect the U.S. dollar to lose its global reserve currency status anytime soon; however, she also noted that this trend is not going away either.
"If you are a central bank holding U.S. dollars and you expect to see more volatility, it makes sense to diversify your reserves a little," she said.
As to gold's price action, Yang said that she expects the market to be fairly fluid, with support over $1,700 and gold making runs to $2,000 an ounce.
"I think this is the range we see for gold. It's going to be a sideways market with a lot of whipsaw price action," she said. "But because of all these bullish drivers, I think there is more upside potential for gold."
Wherever gold is heading, Yang said that she expects the precious metal to continue to outperform equity markets, and that should attract investors.
