Gold investors need to look beyond the headlines

(Kitco News) - It has been an interesting week for gold and silver. After seeing two months of impressive gains, the precious metals started the week under significant selling pressure and, in two days, fell more than 4%, giving up $100.

The headlines were grim, saying that gold saw its worst decline in nearly two years on Monday. But upon further analysis, it’s not until you get to the end of the story that even with gold’s 4% decline, prices are still up more than 17% from their mid-February highs.

Although, at first glance, the price action looks a little extreme and makes for excellent headlines, many analysts have noted that this is a healthy correction in a bullish uptrend. It’s not surprising that some investors have decided to take profits as the timing of the Federal Reserve’s easing cycle gets pushed to the last quarter of the year.

Everyone will be eagerly awaiting the Federal Reserve’s guidance on monetary policy next week; however, it is clear the Fed is now on hold through the summer and likely won’t move until after the 2024 U.S. elections.

According to the CME Fed Watch Tool, markets see an 11% chance of a rate cut in June and a 30% chance of a move in July. This does create solid headwinds for gold as the Federal Reserve’s restrictive monetary policy supports higher bond yields and a stronger U.S. dollar.

But again, let’s look beyond the initial expectations as there is a much more nuanced point of view. Even with the Fed holding the line on interest rates, gold has held solid support in record territory.

The fact is the Fed’s monetary policy has become a secondary story for gold as the precious metal decouples from its historical negative correlation with bond yields and the U.S. dollar.

The biggest driver for gold remains the global threat inflation has on wealth and the purchasing power of fiat currencies. We all know that the U.S. debt is on an unstainable path higher as the government is now spending over $1 trillion in interest payments.

However, they are not alone; the International Monetary Fund recently noted that China is also on an unsustainable path. The IMF also called out nations like the U.K. and Italy for their out-of-control spending.

Billionaire investor Ray Dalio wrote in a commentary on LinkedIn that he holds some gold as a hedge against a potential debt crisis and higher inflation. He described gold as one of the only few examples of “good money” in the financial system.

“It's like cash, except unlike cash and bonds, which are devalued by risks of default or inflation, gold is supported by risks of debt defaults and inflation," he said.

While currently the most vocal, Dalio is not alone in his assessment. Many analysts have noted that the Fed’s monetary policy is just one factor behind rising U.S. bond yields. Another factor is that many investors need to see higher returns to take on more risk.

In an interview with Kitco News, Chantelle Schieven, Head of Research at Capitalight Research, said that the U.S. government’s growing debt is one reason why central banks have bought unprecedented amounts of gold in the last two years.

“Nobody wants our debt right now,” she said. “As the debt grows, it's not surprising that central banks want fewer U.S. dollars and want to diversify their holdings.”

Although gold could continue consolidating, it still has plenty of potential through 2024 and beyond. Have a great weekend!