Gold continues to remain firm as the markets face an uncharted future. With inflation spiraling out of control, the yellow metal is well positioned for the medium and long term.
“You have all the fears of rising recession risks and inflation providing quite a sound backdrop in terms of safe haven demand; not that everybody’s rushing into gold, but people are clearly sticking to gold positions at the moment,” said Carsten Menke, head of next generation research at Julius Baer, to CNBC.
Tough Choice for the Fed
With jobless claims declining slightly to 229,000 and disappointing market expectations, gold has remained relatively unchanged as investors wait for Powell’s testimony.
The Fed has a difficult choice: It can continue to aggressively raise rates and knock the economy into a recession, or it can let inflation run rampant.
“I’ve become more pessimistic about the opportunity of stabilizing inflation at an acceptable level without a recession,” said JPMorgan Chase & Co. chief economist Bruce Kasman to yahoo!finance. Kasman, and many others, anticipate a tight labor market leading to elevated wage demands and increased costs for companies.
Inflation Scapegoats
Labor costs aren’t the only inflation scapegoat. Other experts point to surging gas and commodity prices as being the driver of inflation. Biden has been calling this “Putin’s inflation,” on the theory that the invasion of the Ukraine and its fallout has upended the markets. Some point to the COVID bailout causing inflation, reasoning that the stimulus checks put too much money in the system, though there is debate about this, with many economists noting the European Union recorded 7.5% inflation in March without issuing stimulus checks on the scale the U.S. did. “It’s a global phenomenon. It’s not primarily coming from U.S. stimulus,” Austan Goolsbee, another Obama-era economic advisor, told The New Yorker.
The reality is that there are a number of factors globally impacting and potentially influencing inflation. Regardless of the cause, a portfolio needs safe haven assets because the solutions on the table are all bitter pills. An aggressive Fed will slag the economy and force a recession. A dovish Fed will see long-term sustained inflation. Both outcomes could benefit gold.
Investors can get exposure to physical gold through the Sprott Physical Gold Trust (PHYS). Miners also thrive in high inflation environments, so equities plays like the Sprott Gold Miners ETF (SGDM) or the Sprott Junior Gold Miners ETF (SGDJ) could also protect a portfolio from the economic storms ahead.
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