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(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 offers long-term value and protection in a portfolio, according to a 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 the price performance of gold through 2022, he notes that he has outperformed the bond and equity markets this year.
Many analysts have pointed out in recent weeks that the traditional 60/40 portfolio allocation has had 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 bond is down about 15%. Meanwhile, gold prices are down around 10% so far this year, with prices continuing to hold support at around $1,650 an ounce.
“Right now, diversification isn’t working because everything is correlated,” he said. “But over the long term, we know having a diversified portfolio works,” he said.
In the current environment, Merk said it’s important for investors to look beyond short-term volatility and focus on long-term value, where gold potentially shines the most.
“I don’t know where gold will be tomorrow and, and, and nobody else either. I know I like my gold holdings. I think these high real rates that we have, if you look at the curve , are not sustainable.
While markets are expected to remain volatile in the near term as the Federal Reserve continues to raise interest rates to quell persistently high inflation, many investors are also wondering if the Fed can hit its target before something hits the mark. global economy crashes and triggers a recession.
Merk said 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 rocks international markets.
“We already know that the point of raising interest rates is to break things up. The Federal Reserve is just hoping they can break things up smoothly,” he said. “It seems increasingly unlikely. The Federal Reserve will continue to raise interest rates until something it cares about breaks.”
Despite all the volatility in international markets, forcing major central banks like the Bank of Japan and the Bank of England to intervene, Merk said U.S. money markets were still working. He added that he suspects the central bank is also monitoring credit spreads to make sure they don’t start to widen and threaten to explode.
At the same time, because tensions are so high, Merk said it might not even take a full monetary policy pivot to attract investors to the gold space. While interest rates may not start to fall, the Fed may resume printing money to fix any short-term crisis.
“We’ve known from years of the debt crisis that policymakers are champions for getting the box on the road,” he said. “Now, in the context of gold, I guess the moment this fix starts in earnest, it will be good for gold. It’s the equivalent of a pivot.”
Merk added that some liquidity was already starting to return to the market as Federal Reserve swap lines were activated.
“These swap lines aren’t enough to swing the Fed, but that’s the canary in the coal mine,” he said.
Disclaimer: The opinions 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 the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.
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