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(Kitco News) - Gold prices have fallen to a four-month low as Federal Reserve Chair Jerome Powell has struck a hawkish tone during his two-day semiannual testimony before Congress. However, looking at the broader landscape, one market strategist said that despite the difficult headwinds, gold continues to show relative strength as U.S. monetary policy is only one small aspect driving the gold market.
In a recent interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said that if the gold market can continue to hold critical support at around $1,900 an ounce, there is a good chance prices can end the year higher.
Milling-Stanley said that it is not surprising that the U.S. central bank has maintained its hawkish bias after it left interest rates unchanged at last week's monetary policy meeting. He noted that while inflation has dropped sharply from last year's highs, it is still well above the 2% target.
Instead of looking at short-term opportunity costs of holding gold in a rising interest rate environment, Milling-Stanley said that investors should look at how gold can provide long-term protection and enhanced risk-adjusted returns.
"The fact that we have sticky persistent inflation and we have had it for some time now, well above the Fed's target, I think is probably more important than just looking at what the Fed does from meeting to meeting. There is still a serious possibility of falling into a recession in this country, and that, in turn, might prompt a global recession. That is probably something gold buyers should be thinking about much more."
He noted that given where inflation is, it would not be surprising if the Federal Reserve did raise interest rates again this year. The comments reflect Powell's outlook, who said in his testimony that most Committee members expect to see higher rates by the end of the year.
While gold could continue to struggle in the near term as the Federal Reserve maintains its aggressive monetary policy, George Milling-Stanley said that investors should also consider the impact this will have on equity markets and the growing inflation threat.
He noted that the Federal Reserve's monetary policy continues to weigh on the U.S. economy, dampening earnings.
"I have been saying for a while that equity markets have more to fear from a hawkish Fed and rising interest rates than gold," he said.
Along with rising equity market volatility, Milling-Stanley said that he does not expect the Federal Reserve's slower pace of rate hikes to provide much new momentum to the U.S. dollar, which could give some support to gold.
Milling-Stanley added that growing jewelry demand in China and India will also be another pillar of support for gold through the rest of the year.
As for the argument that gold's price action continues to disappoint because it couldn't hold above $2,000 an ounce, Milling-Stanley said that, again, investors need to look at the bigger picture.
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He noted that only in October gold prices were testing long-term support at $1,680 an ounce. Despite its recent correction, gold prices are up 14.5% from the 2022 lows.
"Last year, we were talking about very, very solid price support in the area between $1,600 to $1,650. So far this year, given that we have not dropped below $1,900, I'm wondering where the support is now. Has the support, in fact, moved up in just 12 months from the $1,600 area to the $1900 area? Has the support area moved up a whole $300," he said. "We'll see how that works out. But at the very least, if you break that 1900 area, then there is still another very, very solid layer of support below that, at around the $1,800, $1,850 area."
Adding to the support in the gold market is the fact that central banks continue to buy gold at a record pace. Milling-Stanley said that he expects central banks to continue to buy gold for the foreseeable future.
"Emerging markets central banks have been behind the vast majority of the buying over the past 13 years because, on average, they have more than two-thirds of their reserves in dollar debt and less than 5% of their reserves in gold," he said. "That is an imbalance they regard as dangerous and an imbalance they're doing their best to address."
As for investment demand, Milling-Stanley said that he expects this segment of the market to pick up as investors take advantage of lower prices.
"If you're somebody who tries to keep your allocation to gold at a fixed level, as you know, then with the gold price being lower, you need to buy some more. Because, otherwise, it's not at whatever that 5% or 10% level may be," he said. The simple act of rebalancing will tell me that I should be buying at this level when the price has been a good deal higher this year."
