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(Kitco News) – Investors can expect gold prices to remain volatile in the near term 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 one hedge fund manager.
Merk Investments CEO and Chief Investment Officer Axel Merk said in an interview with Kitco News that while many investors have been disappointed with gold’s price performance during 2022, he notes that it has been successful in both bond and equity markets this year.
Many analysts have pointed out in recent weeks that the traditional 60/40 portfolio allocation is off to the worst start to a year since the mid-1930s. The S&P 500 is down more than 20% this year, and bonds are down about 15%. Meanwhile, gold is down about 10% this year so far, with prices still holding support around $1,650 an ounce.
“Right now, diversification doesn’t work because everything is correlated,” he said. “But in the long term, we know that a diversified portfolio works,” he said.
According to Mark, in the current environment, it is important for investors to look past short-term volatility and focus on long-term value, where gold may shine brighter.
“I don’t know where gold is going to be tomorrow, and, and neither does anyone else. I know I like my gold holdings. I think these high real rates that we have, if you look out at 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 persistently high inflation, many investors are also wondering whether the Fed can achieve its goals before something breaks in the global economy and triggers a recession.
According to the brand, there is still room for the US Federal Reserve to raise interest rates in the current environment, as the US economy remains relatively resilient despite the turmoil shaking international markets.
“We already know that raising interest rates is to break things. The Federal Reserve just hopes they can break things softly,” he said. “That’s looking increasingly unlikely. The Federal Reserve will continue to raise interest rates until one of those mechanisms breaks.”
Despite all the volatility in international markets, which forced major central banks like Japan and the Bank of England to intervene, Merk said the US money market is still functioning. He added that he suspects the central bank is also watching credit spreads to make sure they don’t widen and threaten to blow out.
Meanwhile, with tensions so high, Merk said it might not even take full monetary policy to lure investors back into the gold space. Although interest rates may not start to fall, the Fed could start printing money again to fix the crisis in the near future.
“We know after years of debt crisis that policymakers are masters at kicking the can,” he said. “Now with gold, my guess is that the moment this patching starts in earnest, it’s good for gold. It’s equivalent to a pivot.”
Merk added that some liquidity is already starting to return to the market after the Federal Reserve’s swap lines have been activated.
“These swap lines aren’t enough to turn the Fed around, but it’s the canary in the coal mine,” he said.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect his own 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 for informational purposes only. It is not a solicitation to make exchanges in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and/or damage arising from the use of this publication.
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