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(Kitco News) - Investors need to be overweight gold as the precious metal still has room to run in a world full of uncertainty and as the U.S. dollar's reserve currency status is chipped away, according to one market strategist.
In a recent interview with Kitco News, Robert Minter, director of ETF Investment Strategy at abrdn, said he sees five reasons why investors should like gold this year.
"Gold should never be a zero weight in a portfolio, but investors could be wise to increase their allocation," he said. "People learned kind of the hard that they're under-allocated to gold."
He noted that with gold's current momentum, it's only a matter of time before prices hit record highs again. Creating this bullish uptrend for the precious metal are market expectations that the Federal Reserve will end its aggressive monetary policy stance before the second half of this year.
Currently, markets see the Federal Reserve implementing one last 25 basis point hike in May and a possible rate cut by the summer. Minter noted that these transition periods have historically been extremely bullish for gold.
"When the Fed paused in 2000, gold rose 55%; when they paused in 2006, gold rose 230%, and when the Fed paused in 2018, gold rose 70%," he said. "The Fed is going to pause because they don't want to be the reason why the U.S. economy falls into a recession."
Minter added that with the Federal Reserve is close to ending its tightening cycle, it's unlikely they will be able to get inflation under control, which means real interest rates will remain low, creating an attractive environment for gold.
He noted that markets will be extremely volatile during this monetary policy transition, but gold could act as an anchor, providing some stability for investors. He said that he expects gold to continue to outperform the S&P 500 as the Federal Reserve continues to tighten its monetary policy into a recession and is then forced to ease rates.
So far this year, the S&P 500 is up 6%, trading over 4,000 points; meanwhile, gold prices are up nearly 9%, currently trading at around $2,030 an ounce.
"This just shows you how much uncertainty is in the marketplace and how much of a premium there is for safe-haven assets," he said. "Gold is never supposed to outperform the S&P 500 when it is recovering."
It's not just investors looking to hedge against market uncertainty and inflation; Minter pointed out that central banks have an insatiable appetite for gold, buying a record 1,136 tonnes last year. So far this year, central banks have purchased 125 tonnes of gold, the strongest start to a year in more than a decade.
Minter said that central bank demand is generating solid value in the marketplace, and he added that he doesn't expect this trend to end anytime soon.
He explained that central banks are also buying gold because it remains an attractive diversification tool against the U.S. dollar.
Minter noted that the U.S. government, in its sanction against Russia for invading Ukraine last year, is using the U.S. dollar as the new "aircraft carrier" diplomacy to dictate foreign policy. He added that this position is prompting a lot of nations to make allies with China.
"De-dollarization story has been heating up in recent weeks, which is not surprising. Access to a payment system should not be a method of enforcing foreign policy," he said. "But if you really want to replace the dollar, you're missing some pretty key factors like the ability to do triangular arbitrage and massive liquidity. However, gold can fill a lot of those needs."
The final reason Minter remains bullish on gold is that although the Federal Reserve has aggressively tightened interest rates because of the banking crisis, it has once again started to unleash liquidity into the marketplace.
Since the start of the latest banking crisis last month, the Federal Reserve has extended $323.3 billion in credit through three of its lending facility, up from just under $5 billion at the start of March.
"Historically, when the Fed balance sheet rises, gold rises," he said.
