Investing.com – After a violent bullish rally that lasted in 2011, gold fell 40% from its highs in July 2011, before reaching nearly $ 1,000 an ounce in 2015.
While a repeat of this pricing pattern this time around is only a “possibility” if the Fed continues to tighten monetary policy, it is still “unlikely,” said Axel Merck, CIO, Merck Investments.
He explained that “a gold investor doesn’t believe the Fed can [رفع] interest for a longer period “. He added: “This [التشديد] It is an appropriate policy today, but [بنك الاحتياطي الفيدرالي] At some point it will stop. “
He added that while he has tried to combat rising inflation throughout the year, price levels are unlikely to fall in the near term.
“We could have a long stagflation period,” Merck said. “The problem with high inflation is that it just doesn’t go down, it catches on,” he explained.
He added that “gold is a volatile investment” given its price history.
The Fed’s reaction
Merck said the Fed’s only tool to fight inflation is the “hammer” to cut demand by raising interest rates, but it won’t be able to hold a tough political stance.
“The Fed really wants things to fall apart,” he said, “and they can rarely stick to strict policy as long as they want, because things will break down and get their attention.”
He pointed to the Bank of Canada’s recent rate hike of 50 basis points, which was lower than expected, indicating a possible move away from the tightening. Merck thinks the Fed might consider a similar move.
“Something will happen that threatens the stability of the financial system,” he said. “At that point, he will say [بنك الاحتياطي الفيدرالي] They have done a lot [التشديد] … and financial stability is the only thing they care deeply about. “
While financial stability is not a formal mandate from the Fed, Merck said it is an implicit mandate, because “the survival of the banking system” is at the “heart” of the Fed’s mission.
What happens when the Fed backs out?
After the Federal Reserve reversed its policy and started cutting, gold and gold miners will benefit as investors flock to gold as an asset diversification tool and a safe portfolio, according to Merck.
“Gold tends to act before stocks,” he said. “Most of the stock is falling late, while gold and gold miners will fall much sooner, at the first signs of a pivot.”
Gold is currently trading close to $ 1,650 and its price has dropped nearly 10% over the year.
Merck said that although gold is “tied” to other assets, such as stocks and bonds, those bonds will break.
He explained that “gold has been a historical diversification factor and its role has been less recent and has become more correlated.” “When these correlations meet, they break down again. I think gold will resume its role as a diversified portfolio.”
