Gold's Reckoning And The Unseen Peril Of The Fed's Folly

(Kitco News) - Despite the Federal Reserve’s tightening bias, it’s only a matter of time before the central bank is forced to cut interest rates, and it's this expected shift that has pushed gold prices solidly above $2,000 an ounce, according to Axel Merk, President and Chief Investment Officer of Merk Investments.

The market has not had a great track record this year trying to anticipate the Federal Reserve’s pivot; however, Merk said that the slowing economy makes it clear that the Fed funds rate has peaked.

"The market is always forward-looking, so we don’t actually need the Fed to start cutting rates for gold to move. There just needs to be the perception that it will happen. People are buying gold because they believe the downward pressure on rates is coming," he said.

While gold has been unable to hold gains above $2,050 an ounce, prices are ending November at their highest monthly price on record. Spot gold prices last traded at $2,034.80 an ounce, down 0.38% on the day but up 2.63% on the monthly chart.

The risk for gold right now is that the U.S. economy continues to "chug along" at its current pace, which would force the Federal Reserve to maintain rates at a restrictive level, but Merk said that even a hawkish pause will not shift the narrative that the next move, whenever it comes, will be a rate cut.

Merk noted that it’s not just gold reacting to market perceptions. He pointed out that the U.S. dollar has lost significant ground in the last three weeks as markets have started to price in a rate cut within the first half of next year.

Along with higher prices, Merk noted that these shifting expectations are creating healthy back-and-forth price action in the marketplace. He said that his firm’s gold-backed exchange-traded fund (NYSE: OUNZ) has seen inflows and redemptions as the fund continues to see net growth.

"I have not seen a period where there has been much activity on both sides, where people are both buying and selling," he said. "This just shows how varied opinions are in the market. If the Fed remains as restrictive as it is right now for the next ten years, then owning treasuries is probably the better deal. Do I think that will happen? No, I don't think so. I don't think this economy can take it, and I don't think the government can take it."

Although some investors are optimistic that the U.S. central bank can orchestrate a soft landing for the economy, Merk said that he has his doubts, and with this much uncertainty, it makes sense to have a well-diversified portfolio that includes gold.

"I think we'll have a more severe recession than is currently priced into the market, which means the Federal Reserve will have to take rates down further," he said. "And that's just because, historically speaking, there's always a soft landing before there's a hard landing."

Originally published by: Neils Christensen on Kitco News