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While markets were pricing in the Federal Reserve’s 50-basis-point rate cut last week, many economists expected a less aggressive approach. However, according to one fund manager, the U.S. central bank, with its new easing cycle, has sent a strong message to investors.
In an interview with Kitco News last week, Ryan McIntyre, Managing Partner at Sprott Inc., said that Powell is walking a very narrow tightrope between supporting U.S. economic activity and managing elevated asset prices.
Although Federal Reserve Chair Jerome Powell has signaled that the central bank is in no major hurry to lower interest rates, McIntyre said investors should pay more attention to the Fed's actions than Powell's words.
“Clearly, with its 50-basis-point cut, the Fed doesn’t want to be seen as being behind the curve,” he said.
McIntyre added that bigger issues are at play than just the Federal Reserve’s monetary policy. He expects the central bank to continue focusing on supporting the economy, even if inflation remains stubbornly elevated.
“U.S. sovereign debt remains the biggest existential threat to the economy. The last thing the Federal Reserve wants is a recession, because that would really blow out the deficit,” he said. “This is the perfect environment for gold, as the Fed’s bias is clearly to the downside. Gold remains the simplest asset to own to protect your wealth and capital.”
Although the Federal Reserve has launched an impressive initial salvo in support of economic activity, McIntyre said he expects it's only a matter of time before investors move into gold to diversify their portfolios.
Even with the Fed’s new easing cycle, McIntyre said he expects the economy to worsen before it gets better. He pointed out that it will take time for the economy to feel the effects of this new easing cycle. He also noted that even with this 50-basis-point move, interest rates are still significantly restrictive.
“There are extreme asset valuations in many different categories, and I think gold is a logical alternative. Even with the rate cut, the economy is not out of the woods yet. I guarantee there are going to be things that happen that we are not talking about today,” he said.
McIntyre reiterated that sovereign debt remains the biggest threat to the global economy.
“If you look at financial markets at the sovereign level, because of high levels of debt worldwide, gold is the only alternative because it is the only asset seen as a global currency.”
McIntyre noted that the U.S. is in a precarious position as the government is expected to spend more than $1 trillion just to service its debt. He added that the threat to the economy arises as the ratio of service payments to GDP surpasses growth forecasts.
According to the Federal Reserve’s updated economic projections, U.S. GDP is expected to grow by 2% for the next three years. Service payments as a percentage of GDP are expected to rise to 3.1% this year, according to estimates from the Congressional Budget Office.
“We aren’t able to grow our way out of this fiscal position, and that is why all roads lead to gold,” said McIntyre. “Eventually, a vast majority of investors will find their way to gold. And gold will absolutely go through $3,000 an ounce; it’s only a matter of time."
Kitco Media
Neils Christensen
