(Kitco News) – The gold market has seen sharp declines in the last three months as the U.S. dollar and bond yields have soared higher; however, one portfolio manager is optimistic that the precious metal is close to carving out 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 some challenging headwinds, the fundamental outlook is starting to shift.
Hathaway’s bullish outlook on gold comes as markets look for the Federal Reserve to raise interest rates by 75 basis points on Wednesday. Hathaway said one of the reasons why he is bullish on gold is because the U.S. central bank is closer to the end of its tightening cycle than it is to the beginning.
He added that tightening monetary policy has probably already pushed the U.S. economy into a recession.
“The Federal Reserve’s hawkish posturing is cratering the economy,” he said. If you look at the economy on a real-time basis, it’s declining. “Any sign that the Federal Reserve is relenting on rate hikes will be good for gold.”
Hathaway said that he would expect the central bank to start to pivot and slow the pace of rate hikes by the end of the summer. He added that the central bank will not want to push the economy into a recession ahead of the November election.
“By the end of summer, inflation could moderate from 9% and the Fed will declare victory. But moderation is not a victory, inflation will still remain high and a problem for consumers,” he said.
Currently, the biggest headwind for gold is the U.S. dollar. Last week the greenback hit a 20-year high and parity with the euro. Although the U.S. dollar is off its highs, it still remains resilient. However, looking ahead, Hathaway said that he expects the U.S. dollar to have less of an impact on gold.
Along with the growing recession threat in the U.S., Hathaway said that he also sees signs of a potential sovereign debt crisis in Europe. Last week the European Central Bank surprised markets with a 50-basis point hike. The ECB also announced that it would continue to buy bonds from troubled nations to ensure the European bond market doesn’t fragment.
“A sovereign debt crisis could easily push gold prices back to record highs, regardless of where the U.S. dollar is,” he said. “The next black swan out there will be connected to unruly F.X. markets. Systemic risks out there in the financial markets are as high as it has ever been in the 20 odd years, I’ve been in the gold market.”
Not only is the fundamental outlook starting to change for gold, but Hathaway said that the market’s speculative positioning is ripe for a contrarian trade. He added that sentiment in the gold and mining sector has hit multi-year lows.
“I look at these numbers as a signal about sentiment and people being despondent, discouraged. It’s from these low points in terms of psychology that you get these dramatic rallies,” he said.
As to how much gold investors should hold in the current environment, Hathaway said there is an argument to be made to be 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 last 20 years,” said Hathaway. For a conservative investor who wants real protection, 5% of your portfolio is not crazy.”
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