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(Kitco News) Gold at $1,800 an ounce has a role to play in a portfolio despite the Federal Reserve still pursuing its aggressive tightening cycle, said DoubleLine Capital CEO Jeffrey Gundlach.
"I've been somewhat favorable on gold. Once it got to $1,800, it went quite a bit higher than that, but it's now come back down to almost $1,800. And gold probably deserves a role in portfolios at $1,800 type dollar price, even though the Fed is raising interest rates," Gundlach said during a Tuesday webinar titled 'Survivor.'
Gundlach noted that gold had been stuck in sideways trading action for the past two and a half years. "Not much going on here. Some volatility, but we're right in the middle of the range at $1,800," he said.
At the time of writing, April Comex gold futures were trading at $1,818.80, down 0.07% on the day.
Gold makes sense even though at the March meeting, which is scheduled to happen in just two weeks, the Fed is "very likely" to go with a 50-basis point increase, Gundlach pointed out. "After Powell's testimony, the chances of a 50 basis point increase have gone up a lot in the betting markets and in the yield curve shape," he said.
When it comes to rate outlook predictions, Gundlach relies on the 2-year yield, which the Fed has mirrored for years. "We don't need the Fed. All we need is the 2-year Treasury," he said.
And after Powell's message, the 2-year yield rose above 5% for the first time since 2007. "It's now corroborating the idea that the Fed will probably take the fed funds rate up to 5% at the upcoming meeting," Gundlach said.
The only thing that could change the Fed's hawkish mindset is a downside surprise in the employment data, scheduled for this Friday. But that scenario is unlikely, given that market consensus calls for more than 200,000 jobs and the unemployment rate at 3.4% in February.
"The only way that won't happen is if the employment data and the unemployment rate ... surprises to the downside. That has not been the pattern recently," Gundlach said. "If it comes in at or above expectations, I think it's a lock that the Fed's going to go with 50 basis points at a minimum."
Deficit awareness is something to pay attention to this year as the debt ceiling debate heats up in the U.S., Gundlach added.
"One of the big catalysts that's making the deficit go up is the Federal Reserve now losing money thanks to their own interest rate increases," Gundlach noted. "We obviously have the budget debt ceiling debate coming up later this year. As in the past, I expect that they're going to yell at each other and then find a way to paper it over."
But this is going to be a big problem eventually. "It's no longer your grandchildren's problem. It's our problem in real-time, in just a few years, and we will address it," Gundlach said.
One of the things making the deficit worse is the ever-increasing fiscal responses to recessions, Gundlach explained. "We've gone into this mode of ever larger doses of opioids to combat these recessionary downturns. And it will be interesting to see how we deal with that while simultaneously having to reckon with this deficit problem."
And now the U.S. government will face higher inters rate costs. "The burden of the debt and the funding of the interest payments are really on the march," Gundlach said. "The Treasury Department needs to borrow a lot of money, but also has a lot of bonds rolling off in the next three years. And a lot of those bonds probably were paying out interest rates of zero to 3%, and they're going to be replaced with yields of right now it'd be 4% or 5%."
