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(Kitco News) – The gold market has seen steep declines over the past three months as the US dollar and bond yields soared; however, a portfolio manager is bullish that the precious metal is close to carving a bottom as prices hold support at $1,700 an ounce.
In an interview with Kitco News, John Hathaway, Senior Portfolio Manager of Sprott Hathaway Special Situations Strategy, said that while gold still faces headwinds, the fundamental outlook is starting to change.
Hathaway’s bullish outlook for gold comes as markets hope the Federal Reserve will raise interest rates by 75 basis points on Wednesday. Hathaway said one of the reasons he is bullish on gold is that the US central bank is closer to the end of its tightening cycle than the beginning.
He added that the tightening of monetary policy has likely already pushed the US economy into a recession.
“The Federal Reserve’s hawkish posture is cratering the economy,” he said. If you look at the economy in real time, it is declining. “Any sign that the Federal Reserve is giving in to rate hikes will be good for gold.”
Hathaway said he would expect the central bank to start pivoting and slowing the pace of rate hikes by the end of the summer. He added that the central bank will not want to plunge the economy into a recession before the November election.
“By the end of the summer, inflation could moderate from 9% and the Fed will declare victory. But moderation is not a victory, inflation will always remain high and a problem for the consumers,” he said.
Currently, the biggest headwind for gold is the US dollar. Last week, the greenback hit a 20-year high and parity with the euro. Although the US dollar has retreated from its highs, it remains resilient. However, looking ahead, Hathaway said he expects the US dollar to have less impact on gold.
Along with the growing threat of recession in the United States, Hathaway said he also saw signs of a potential sovereign debt crisis in Europe. Last week, the European Central Bank surprised the markets with a 50 basis point hike. The ECB also announced that it would continue to buy bonds from troubled countries to ensure that the European bond market does not fragment.
“A sovereign debt crisis could easily drive gold prices back to record highs, regardless of the position of the US dollar,” he said. “The next black swan out there will be hooked up to unruly forex markets. Systemic risks in financial markets are as high as they’ve ever been in the 20 odd years I’ve been in the market gold.”
Not only is the fundamental outlook starting to change for gold, but Hathaway said the market’s speculative positioning is ripe for contrarian trading. He added that sentiment in the gold and mining sector hit multi-year lows.
“I see these numbers as a signal of people’s sentiment and despondency. It’s from these low points in terms of psychology that you get these dramatic rallies,” he said.
As for how much gold investors should hold in the current environment, Hathaway said there’s a case for being overweight. Research from the World Gold Council suggests that investors should hold between 2% and 10% of their portfolio in gold.
“Physical gold has proven to be an important diversifier over the past 20 years,” Hathaway said. For a conservative investor who wants real protection, 5% of his portfolio is not crazy.”
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