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(Kitco News) - Investors should continue to view gold as an important strategic asset even as the precious metal will face challenging near-term headwinds after the Federal Reserve hits pause on its aggressive monetary policy stance but maintains its hawkish stance, according to the World Gold Council.
In an interview with Kitco News, Joseph Cavatoni, head market strategist for the Americas at the World Gold Council, said that it's clear the Federal Reserve is maintaining a solid hawkish bias, signaling potentially two more rate hikes this year.
In his press conference following the central bank's monetary policy decision, Federal Reserve Chair Jerome Powell said that nearly all Committee participants saw more rate increases as appropriate.
For investors looking for a potential pivot, Powell said that none of the committee members see a rate cut this year.
"It will be appropriate to cut rates at such time as inflation is coming down really significantly, and again, we're talking about a couple years out," Powell said.
Cavatoni said that this hawkish stance will continue to weigh on gold as its opportunity costs of a non-yielding asset remain elevated.
However, he added that while the Federal Reserve is fighting to bring inflation down to its 2% target, its aggressive stance will create additional uncertainty for the global economy. He noted that an elevated rate environment creates some risks for the credit market and could potentially push the economy into a recession.
"Gold will continue to struggle in the near term as the Federal Reserve maintains these elevated interest rates, but it still remains a strategic asset to hold against potential financial market risks," he said.
Cavatoni's gold outlook comes as prices trade near a three-month low as investors digest Wednesday's decision. August gold futures last traded at $1,948.70 an ounce, down 1% on the day.
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While the U.S. economy has remained relatively resilient in an elevated interest rate environment, Cavatoni said that investors still need to monitor growing risks and protect themselves. He added that the WGC maintains its view that the U.S. economy will likely see a mild recession this year.
While gold's upside potential could be limited through the summer, Cavatoni said he doesn't expect to see any significant drive drops. He noted that strategic global investors in gold-backed exchange-traded products continue to see value as market uncertainty remains elevated.
He noted that gold is the fourth best-performing asset this year behind equity markets, which are being driven by surging momentum in the tech sector.
"In this difficult environment, gold continues to perform well because investors see the value in holding a safe-haven asset," he said.
Cavatoni added that investors should also continue to pay attention to what central banks are doing as they continue to be net buyers of gold.
"We continue to see a limited number of banks selling their gold; the majority of emerging market central banks continue to buy," he said. "If you want to know what to do as an investor, look at what central banks are doing. They are buying gold at strategic lower levels."
As to how far gold prices could fall this summer as the Federal Reserve maintains its hawkish s tance, Cavatoni said we will continue to see headwinds in the short-term which will lead to range-bound price volatility and a possibility of gold prices falling below $1,900 an ounce. However, he added that even if prices fall $100, it still remains a healthy market.
