EDITOR'S NOTE: Here’s an example supporting the idea that gold is as much a hedge against the Fed as it is a hedge against inflation. Despite rising inflation, gold is still hovering near its three-month lows. What’s happening? Investors believe the Fed’s rate hikes threaten the prospect of gold’s appreciation in value. Rather than seeing current declines as a buying opportunity, as gold and silver are cheap enough to be considered bargains at these levels, they take it as a bearish indicator. This reaction is predicated on the notion that the Fed may indeed achieve a soft landing. The Kitco article below analyzes in great detail the arguments for and against this notion. Historically, the Fed has a poor record of easing inflation without crashing the markets. The path to avoiding volatility is razor thin and the odds of a misstep are enormous. One of two things is likely to come about, both of which are pressing hedge candidates for safe-haven assets like gold: either the market crashes or the Fed’s incremental steps will just lead to a prolonged inflationary uptrend.
The gold market continues to struggle to make material gains above $1,800 an ounce. Still, the precious metal remains cheap as investors continue to miss-price risk in the marketplace, according to one market analyst.
In his latest market commentary, Thorsten Polleit, chief economist of Degussa, said that both gold and silver are relatively cheap as investors ignore the growing risk that the Federal Reserve will push the U.S. economy into a recession as it raises interest rates.
According to the CME FedWatch Tool, markets expect interest rates to be at least 3% by the end of the year. Markets expect the U.S. central bank to raise interest rates by 50-basis points at the next three monetary policy meetings.
"That doesn't sound much. But the expectation that the Fed would end its extremely expansive policy has already triggered something of a landslide on the financial markets," he said in the report.
One of the reasons why gold and silver have seen significant selling pressure in the last four weeks is because investors have faith that central banks can engineer a "soft landing" that will weaken the economy enough to slow-growing inflation pressures but not enough to push it into a recession.
"As long as financial markets are reasonably confident that central banks can strike an acceptable balance between raising interest rates to curb inflation and preventing the financial and economic system from falling off the cliff, gold and silver prices may be prevented from rising sharply for now," he said. "however, the risk that central banks will not succeed in their plans and cause a major crisis is real, and it is non-negligible."
However, he added that the U.S. central bank is walking a very narrow path, which has been made difficult because of massive government debt worldwide. Polleit noted that global debt levels represented 351% of global GDP.
"The risk that something could go wrong is enormous, especially given record levels of global debt," he said.
Even if the Federal Reserve can avoid pushing the economy into a recession, Polleit said there is still potential for gold and silver once investors realize that inflation will remain elevated longer than expected.
"A likely scenario is that central banks will hike interest rates a bit more, but not to the point of "crashing the system to lower inflation." This suggests that goods price inflation will remain elevated for longer but may not spiral out of control," he said. "Real interest rates, i.e., nominal interest rates net of inflation, will most likely remain in negative territory for years to come."