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The Federal Reserve is on the cusp of shifting its monetary policies, but it won't be enough to stop the growing inflation pressures, and it is only a matter of time before investors return to gold to protect their wealth, according to one market strategist.
As the Federal Reserve starts its two-day monetary policy meeting, expectations are growing that the central bank will reduce its monthly bond purchases. At the same time, markets are pricing in a rate hike as early as June. However, Robert Minter, director of investment strategy at abrdn (formerly Aberdeen Standard Investments), said, in a recent telephone interview with Kitco News that the new hawkish tones in the Federal Reserve won't be able to stop inflation from rising.
"Tighter monetary policies won't solve the backlog in the Ports; it won't bring new microchips online," he said. "All they are going to do is create a new hurdle to grow cap-ex when it is actually needed. Federal Reserve policies can't fix supply-side issues."
Minter added that the ultimate risk is that rising inflation leads to stagflation as global consumption drops.
"The ultimate sweet spot for gold is stagflation because you have higher inflation and a lower U.S. dollar," he said. "Right now, investors aren't quite convinced that stagflation is the scenario that plays out going forward but could quickly change. You certainly cannot take stagflation out of the realm of possibilities."
Looking at the gold market, Minter said that he expects it's only a matter of time before the current price attract investors looking for protection and value.
"If you look at where real yields are right now, it looks like gold prices should be closer to $1,900 than $1,800 an ounce. Gold right now looks cheap to us," he said.
"Until the government finds a way to get rid of its $28 trillion in debt and the $8 trillion on the Fed's balance sheet, we are not sellers of gold," he added.
Not only is the Federal Reserve unable to resolve inflation driven by the ongoing global supply crunch, but Minter said that growing demand for raw materials is going to keep inflation elevated for a prolonged period.
Minter added that the global push for more renewable clean energy will continue to drive demand for raw materials like copper and aluminum.
"The government has thrown a lot of money into the economy and yet it has not solved a single problem," he said. "It's going to take a lot more money to upgrade the infrastructure and build a green economy. You can't spend all that money and not have higher inflation."
Along with gold, Minter is also bullish on silver as the metal will benefit from the green energy revolution. He added that silver will quickly become an essential industrial metal like copper and aluminum.
By Neils Christensen
For Kitco News
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