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Hold on to your gold; a Fed rate hike in 2023 could be too little to late for inflation - VanEck's Joe Foster
By: Neils Christensen | July 21, 2021

The gold market continues to struggle as investors focus on the potential for tighter monetary policy and transitory higher inflation pressures.

However, one fund manager says that the rally in the gold market is far from done as there is still plenty of uncertainty to support precious metals prices. In a report published last week, Joe Foster portfolio manager, of the VanEck Gold Strategy, said that he still sees potential for gold prices to push back to $2,000 an ounce by the end of the year as it could be too little too late for the Fed to stop the growing inflation threat.

Despite the bullish outlook, the gold market struggles to break through critical resistance levels and is testing support just above $1,800 an ounce.

Although markets are focused on the U.S. central bank reducing its bond purchasing program by the end of the year, Foster said that looking at the big picture, there is still plenty of stimulus being pumped into global financial markets.

"For now, purchases continue at the extraordinary rate of $120 billion per month and rates remain near zero, which should intensify concerns that this unprecedented level of monetary (along with fiscal) stimulus could bring on an inflationary cycle. If fears of higher inflation are what prompted Fed members to forecast rate hikes in 2023, then 25 basis point increments two years from now may likely be too little, too late," he said in the report.

Although the Federal Reserve continues to expect rising inflation to be transitory, Foster said that higher prices could prove to be stickier than they are expecting. He added that inflation surprises have historically been a strong driver for gold prices.

"Global growth is picking up, trillions of dollars in U.S. fiscal spending, and the increasing demand for many metals as part of the global energy transition, should support commodities in the longer term, contributing to higher inflation expectations. In addition, ongoing monetary stimulus, alongside expected fiscal stimulus, adds conviction to the "here-for-longer" inflation case," he said.

While markets expect the Federal Reserve to start to tight monetary policy eventually, Foster said that the central bank will be limited in what it can do. Higher interest rates could drag down economic growth and add to the growing global debt burden, he added.

"The risk of lower real rates, a weaker than expected post-stimulus economic recovery, higher inflation, a weaker dollar, extreme debt levels, the final bursting of asset price bubbles and other unintended consequences of the massive liquidity injected into the financial system are all factors that may support higher gold prices in the longer-term," he said. "It is not hard to imagine an environment where more than one of these risks could come into play, significantly increasing gold"s appeal as a safe haven, inflation hedge and portfolio diversifier."

While there are plenty of long-term fundamental factors that support gold prices, Foster noted that the most significant headwind for gold remains the U.S. dollar. The greenback has shown some resilient strength even as bond yields have dropped to their lowest levels since the start of the year.

Foster added that a weaker U.S. dollar could be the key to drive gold prices back to $2,000 an ounce.

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