– Neils Christensen: Although markets are expecting the Federal Reserve to raise interest rates three times this year, starting as early as March, one research firm says there are three factors converging together to create the perfect storm for the gold market.
Michael Howell, managing director at Crossborder Capital, said in an interview with Kitco News that even after gold’s strong performance at the start of the year, he still sees value in the yellow metal as the Federal Reserve remains behind the inflation curve, the US dollar weakens and global central banks — in particular the People’s Bank of China — continue to pump liquidity into financial markets.
While not having a specific price target, Howell said that he could see gold prices 10% to 15% higher in the medium term.
The Federal Reserve’s March monetary policy meeting is garnering a lot of attention in the gold market due to rising expectations that the Fed will raise rates. However, Howell said the data is not totally conclusive that the U.S. will see strong growth in 2017 and that could continue to force the central bank to remain on the sidelines.
He added that even if the Fed does raise interest rates, the key for gold prices will be the fact that real rates are expected to remain low because of higher inflation.
“The Fed is not likely to be ahead of the inflation curve,” he said. “I think the Fed has an unofficial policy to keep real rates low to promote growth and that will be positive for gold prices.”
While gold prices have dropped recently — last trading at $1,233.30 an ounce — the yellow metal is still up 7% since the start of the week.
Feeding into higher inflation is the fact that Crossborder Capital expects to see weakness in the US dollar as liquidity dries up because China and Europe are starting to see capital flow back into their markets.
Howell explained that China, which a few years ago relaxed its capital controls, has had the biggest impact on US dollar strength. However, to support its currency, the government is now once again strengthening its capital controls and more money is staying within the country.
Howell added that optimism is starting to build around the European economy again and investment dollars are moving into those undervalued markets.
“The trend that we are seeing in capital flows, there is no guarantee that the US dollar will hold onto its strength. A weaker US dollar is positive for the entire commodity complex and in particular for gold prices.”
Finally, not only is more money staying in China but the People’s Bank of China has started the printing presses in an effort to promote economic growth.
“If you have a growth machine driven by the People’s Bank of China then that is not a bad recipe for gold prices to move higher,” he said.
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