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(Kitco News) - Although gold prices have fallen to a three-month low, testing support just above $1,900, one market analyst noted that there is still solid strength in the marketplace as investors continue to see value in holding some precious metals.
In a recent interview with Kitco News, Axel Merk, president and chief investment officer at Merk Investments, said that despite the near-term selling pressure, it is worth noting that gold is still doing relatively well in a challenging environment.
The gold market has been hit with a wave of selling pressure as Federal Reserve Chair Jerome Powell signals that the central bank is on track to raise interest rates two more times this year as it attempts to bring inflation down to its 2% target.
Despite this aggressive stance, gold is holding on to support above $1,900 an ounce. Gold prices are still more than $200, up from the two-year lows seen in October and are above their 200-day moving average at around $1,860. Spot gold prices last traded at $1,910 an ounce, relatively unchanged on the day.
Merk said that he expects gold prices to remain volatile in the near term; however, he added that despite the speculative ebb and flows in the market, it appears that long-term investors are reluctant to let go of their gold.
He added that despite improving market sentiment, there are still significant risks looming on the horizon. He noted that many of the risks remain "unknown unknowns."
"The Federal Reserve's higher-for-longer stance is not a strategy. It's a tactic that we don't know the impact of just yet," he said.
Merk said the Federal Reserve has been clear that it needs to slow the economy down to cooling inflation and bring it down to its 2% target.
"We are often overthinking this. The Fed wants to slow this economy down, and I don't see any reason why they won't succeed. At the same time, they want to have a soft landing. Well, I like ice cream for dinner too, but that doesn't mean it's going to happen," he said. "Even though we've been surprised that this economy is reasonably resilient. It doesn't make sense that we can have these high rates for an extended period without substantial things breaking."
Merk said he is not convinced that the Federal Reserve will be able to get inflation under control before it breaks something in the economy or financial markets. Looking at the inflation threat, He added that with so much debt in the system, there is very little political will to bring inflation down.
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"A government's incentive is to debase the purchasing power of its currency. Because then the debt is worth less. But as an investor, you have an incentive to keep your purchasing power."
In an environment of stubborn inflation and growing economic risks, gold remains an attractive portfolio diversifier, Merk said. He added that both scenarios could be positive for gold long-term as government and investors' goals are not aligned.
Using 2022 as the latest example, Merk noted that the traditional 60/40 portfolio strategy does not do well in a high inflationary environment. Although inflation has come off its 40-year peak from last year, it still remains elevated compared to recent history. In the current climate, Merk said that one comment he is hearing from a growing chorus of investors is that they don't trust this equity market rally.
"it's quite possible that equity markets are going higher. But, no, I, I don't, I don't like them now," he said. "But it doesn't always have to be stocks or bonds. There's a broader world out. It's just a question of what risks can you afford."
