(Kitco News) – Investors can expect gold prices to remain volatile for the foreseeable future as markets react to ever-changing interest rate expectations; however, the precious metal still provides long-term value and protection in a portfolio, according to one hedge fund manager.
In an interview with Kitco News, Axel Merk, president and chief investment officer of Merk Investments, said that while many investors have been disappointed with gold‘s price action through 2022, he notes that it has outperformed both bond and equity markets this year.
Many analysts have pointed out in recent weeks that the traditional 60/40 portfolio allocation has seen its worst start to the year since the mid-1930s. The S&P 500 is down more than 20% this year and an aggregate of bonds is down roughly 15%. Meanwhile, gold prices are down about 10% so far this year as prices continue to hold support at around $1,650 an ounce.
“Right now, diversification doesn’t work because everything is correlated,” he said. “But over the long run, we know that having a diversified portfolio does work,” he said.
In the current environment, Merk said that it is important for investors to look past short-term volatility and focus on long-term value, which is where gold potentially shines brighter.
“I don’t know where gold will be tomorrow and, and, and neither does anybody else. I do know that I like my gold holding. I do think that these high real rates that we have, if you look out the curve, are not sustainable.”
While, markets are expected to remain volatile in the short term as the Federal Reserve continues to raise interest rates to cool down persistently high inflation, many investors are also wondering whether the Fed can achieve its goal before something in the global economy breaks and triggers a recession.
Merk said that the Federal Reserve still has room to raise interest rates in the current environment as the U.S. economy remains relatively resilient even as turmoil roils international markets.
“We already know that the whole point of raising interest rates is to break things. The Federal Reserve is just hoping they will be able to break things softly,” he said. “That is looking more and more unlikely. The Federal Reserve will continue to raise interest rates until something they care about breaks.”
Despite all the volatility in international markets, forcing major central banks like the Bank of Japan and Bank of England to intervene, Merk said that U.S. money markets are still functioning. He added that he suspects the central bank is also watching credit spreads to make sure they don’t start to widen out and threaten to blow out.
At the same time, because tensions are so high, Merk said it might not even take a full pivot on monetary policy to attract investors back to the gold space. While interest rates might not start to move lower, the Fed could restart printing money to patch any crisis in the near term.
“We know from the years of debt crisis that policymakers are champs at kicking the can down the road,” he said. “Now, in the context of gold, my guess is that the moment this patching starts in earnest, that will be good for gold. It’s equivalent to a pivot.”
Merk added that some liquidity is already starting to come back into the marketplace as swap lines at the Federal Reserve have been activated.
“These swap lines are not sufficient enough for the Fed to pivot, but it’s the canary in the coal mine,” he said.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals…
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