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The Federal Reserve has pumped trillions of dollars to stabilize the U.S. economy and financial markets devastated by the COVID-19 pandemic. With that trend expected to continue for the foreseeable future, one market strategist said the best way not to fight the central bank is by investing in precious metals.
In an interview with Kitco News Mike McGlone, senior commodity strategist at Bloomberg Intelligence, said the gold market is looking a little stretched. Prices have pushed to a record high and within striking distance of $2,000. He added that fundamentally, gold is nowhere near overvalued levels as the U.S. central bank continues to pour money into financial markets.
McGlone said that he would recommend investors look to buy gold on dips as the price could continue to hover around $2,000 through the U.S. November elections.
"In the short term, we have gold about 21% above its 52-week mean, that's the most since the peak in 2011," he said. "You don't want to be the first buyer at these levels. Anytime gold gets this high above its 52-week average, you got to expect consolidation."
Although gold investors should be a little more strategic with their buying, McGlone said that they shouldn't lose sight of the bigger picture, which is materially higher gold prices. McGlone reiterated his call that gold will needs to get “stupidly” expensive before this rally ends and that could mean prices above $4,000 an ounce.
"Basically, after 2008, gold dropped around $700 and then it rallied around three times to the peak in 2011," he said. "So just a simple rhyme of history means we get to near $4,500 and it's about time. You just have to look at debt to GDP, look at central bank balance sheets, and they're just on an upward trajectory."
As to what gets gold to those levels, McGlone said that investors should continue to watch equity markets. With bonds providing investors with no yield, a bear market in equities would drive gold's safe-haven appeal, he said.
"Now the rock is beating stocks. There's a sense in the market that the bull market in stocks is over… and gold should take off," he said. "That, to me, is the next big trade."
Although the Federal Reserve's unprecedented monetary policy measures are artificially driving stocks higher, McGlone said this factor is seeing diminishing returns. He added that it's only a matter of time before the effects of the Fed's money printing wears off.
"The S&P 500 is almost up 200%, 300% over the last ten years. It just can't continue to do that. Not without strong, solid economic growth earnings," he said. "Yes, we're getting a bid from monetary, fiscal stimulus, but that is dicey and that's not going to last."
By Neils Christensen
For Kitco News
