?? VanEck Fund Manager Joe Foster: Rising inflation meets headwinds for gold
?? Despite minus in 2021: average gold price has risen since the beginning of the corona pandemic
?? Foster: Fed monetary policy will drive gold prices
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Although inflation rates have risen sharply in recent months – the rate of inflation is now seven percent in the USA and five percent in the euro zone – the crisis currency gold has not really been able to benefit from this. Theoretically, the price of the yellow precious metal should rise as the currency depreciates, because it is considered a safe haven, but the gold price is currently moving at around the level of a year ago. In the past year, the raw material has even lost around four percent in value.
According to the commodities information platform “Kitco”, Joe Foster, portfolio manager at the fund provider VanEck, explains this in a report on the gold market with the fact that rising inflation is countered by numerous factors that provide headwind for the precious metal. In this context, he cites the strengthening momentum in the US dollar, which appreciated again from mid-2020 to mid-2021, making gold more expensive and less attractive for investors outside the US, the record valuations in the stock market and the hunger for cryptocurrencies. The latter may also be used by some investors instead of gold as a hedge against an arbitrary expansion of the money supply, since the maximum number of coins available is limited for many digital currencies. “In a mania, most investors lack a sense of risk and they see no reason to invest in an investment that is considered a safe haven,” writes Foster – probably with a view to the last two points mentioned.
According to the VanEck expert, the increasingly hawkish rhetoric of the Fed is also partly responsible for the weak performance of gold. Because when interest rates rise, the precious metal, which itself does not yield any interest, also becomes less attractive. “While we think the Fed’s delayed response to inflation may be a bit late, markets appear to have blind faith in the Fed’s ability to manage the economy,” Foster said, according to Kitco. Still, gold investors shouldn’t bury their heads in the sand. Because despite the minus in 2021, there is also positive news to report for the gold price – and the expert believes in a significant upside potential for the precious metal in 2022.
Gold higher average price since pandemic began
Gold is definitely in demand in the corona pandemic, even if the performance in 2021 was negative. The price of gold hit a new all-time high of $2,063 in August 2020, and Foster also points out that the average price of gold has increased significantly since the Corona crash in March 2020. “The many uncertainties and risks that came with the pandemic, along with radical fiscal and monetary policies, have propelled gold to new heights as investors have sought safety. Gold prices have averaged US$1,817 since the March 2020 pandemic crash -dollars per ounce,” said the expert. In the period from 2013 to 2019, the average gold price was significantly lower, at just $1,250 an ounce, writes the “Neue Zürcher Zeitung”.
Past data also shows that gold’s era is yet to come, Foster said, according to Kitco. The fund manager has looked at the metal’s performance during the two previous periods of high inflation – the 1970s and between 2003 and 2008 – and concluded that the commodity still has plenty of time to rally. “In each of these inflationary bouts, gold has underperformed other commodities in the first half and outperformed in the second half. It seems like markets don’t take inflation (or gold) seriously until they find it stubborn proves,” says Foster, who believes that consumer prices will continue to rise in the future.
The Fed’s monetary policy as a driver for the price of gold
According to the VanEck expert, the monetary policy of the US Federal Reserve will also ultimately ensure a rising gold price. This sounds paradoxical at first, since rising interest rates are actually unfavorable for gold investors. But Foster refers to a study by the major Swiss bank UBS, according to which gold in past cycles of rising interest rates lost between five and ten percent in the six months before the first interest rate hike, but rose by ten to 20 percent in the six months that followed .
Furthermore, the expert considers the market’s expectations of the US Federal Reserve – namely four interest rate hikes in 2022 and the start of the reduction of the bloated balance sheet – to be a bit too aggressive in some cases. “The Fed has a history of staying too loose for too long. That got the economy into trouble when the tech bubble burst and the housing bubble burst. This time we have a bubble on everything and inflation,” like Foster. So he thinks the Fed could end up either talking more than acting, or doing serious damage to the economy by acting. Both would probably be positive for the price of gold and would ensure that safe havens are sought again.
In fact, according to “FONDS profi” Foster warned as early as November 2021 that there could be a crash on the stock market if the Fed turned off the money supply. “Unlike the market, we believe there is a significant risk that once the Fed withdraws liquidity, the liquidity fueled economy and the stock market will stop functioning,” said the portfolio manager. In such a scenario, the importance of gold as a risk hedge would increase again.
Another expert sees a chance for a gold rally in 2022
Peter Grosskopf, CEO of the investment manager Sprott, which specializes in precious metals, also expressed confidence in “Kitco” about the performance of gold in the current year. In his opinion, investors may be underestimating how the Fed’s monetary policy will affect market conditions and how difficult this year really is for the stock market. The unprecedented run in equities would already be slowing, which could also drag down economic growth and force the Fed to become less aggressive on monetary policy. However, that would be negative for the fight against inflation.
In addition, the Fed would be doing too much with an end to the bond purchase program in March, the planned interest rate hikes and the reduction of the balance sheet, according to Grosskopf. “The chances are very slim that they can pull this off without some form of market correction,” said the Sprott CEO. On the other hand, however, the “chances are very good that we will have all the right conditions for gold,” Grosskopf continued. He therefore believes that gold will rise to record levels again by the end of the year. “I think a move like this is doable if there is a broader market correction. I think we’re going to have a slow paced rally [beim Goldpreis] see until people start to worry and then we will see an explosive jump,” said the precious metals expert.
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