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(Kitco News) - The gold market continues to face a challenging economic environment as hawkish monetary policies worldwide continue to support rising bond yields.
In a single panel discussion this past week, European Central Bank President Christine Lagarde, Bank of England Governor Andrew Bailey, and the Federal Reserve Chair Jerome Powell said that interest rates will have to go higher to bring inflation down to 2%. Even the Bank of Japan Governor, Kazuo Ueda, had a hawkish tilt, opening the door to abandoning its ultra-easy policy one day.
It's not surprising that gold is testing support at $1,900 after listening to the comments from four prominent central bankers. While gold has managed to hold this critical psychological level, many analysts are expected this support to break, which could push gold prices down to their 200-day moving average around $1,860 an ounce.
But at this point, you can't blame investors for staying away from gold, as they can get a roughly 5% yield on short-term money market funds. With the resilience of the U.S. economy, many fund managers see this as risk-free money.
This past week's economic data shows that the U.S. Gross Domestic Product rose 2% in the first quarter, significantly beating expectations. First-quarter growth came even as the U.S. banking sector saw its biggest failures since the 2008 Great Financial Crisis.
Unfortunately, gold won't be going back to $2,000 an ounce anytime soon, but does that mean investors should completely give up on the precious metal. One key theme we have been hearing from many market experts is that despite the bearish price action, there are still reasons to hold gold in your portfolio.
You don't have to look hard to find potential risks in the global economy. Last week mercenaries with the Wagner Group, led by Yevgeny Prigozhin, launched an armed rebellion and marched to within 200 kilometers of Moscow. Yes, the insurrection failed within 36 hours of starting, but it showed how fragile the world's social fabric is.
This uncertainty could continue to grow as consumers globally face rising food prices and central banks tightening credit conditions. People are getting squeezed, and economic growth is being choked from both sides, which will continue to ferment social unrest, according to market and political analysts.
At the same time, despite the solid Q1 performance, the threat of a recession in the U.S. remains as the Federal Reserve continues to tighten interest rates.
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| The Fed's soft landing is like having ice cream for dinner: it's not going to happen - Axel Merk |
In an interview with Kitco News, Axel Merk, president and chief investment officer of Merk Investments, said that it is unlikely the central bank will be able to maintain this aggressive stance without something breaking. He added that the Fed just hopes that breaks can easily be fixed.
"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.
While there is still a role for gold in your portfolio, the question now becomes, how much should you own. In its third-quarter multi-asset portfolio strategy, French Bank Société Générale said that it is maintaining a 6% core position. The analysts said they still see a path for gold to rally to record highs by the end of the year.
Finally, in other positive news for the gold market, investors are getting younger, according to a recent investor survey conducted by State Street Global Advisors, as investors look to increase their gold investments in the next six to 12 months.
According to the survey, Millennials currently have a higher percentage of gold, around 17%, in their investment portfolio. Both Gen X and Boomers hold about 10% of their portfolio in gold, respectively.
That is it for this week. To our Canadian audience: happy Canada Day on Saturday.
