Where will you be in two years?

Gold & Silver

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(Kitco News) - You can put away the vision board because I know where I will be in two years: starting at zero percent interest rates. At least that is according to the Federal Reserve’s latest interest rates projections.

For many gold investors, this long-term forecast represents the perfect environment for gold. We can see renewed positive sentiment in the marketplace as prices are now pushing to the top of their two-month range.

But as much as monetary policy is supporting gold prices, I think we need to take a look at the exuberance that has dominated equity markets. Investors are getting spooked as they start to think about the implication of the U.S. central bank’s projections. We saw the Dow Jones Industrial Average drop more than 8% on Thursday, reminiscent of the panic we saw only three months ago.

How healthy is the economy if the Federal Reserve has to keep interest rates at its zero-bound target for the next two years? This was the thought that popped into my head after talking with Chris Vecchio, senior currency strategist of IG Group. He said that the Fed knows the U.S. economy is not coming back as it continues to feel the economic effects of the COVID-19 pandemic.

“We need confidence and courage to get back on track. People need to know that when they go out to do grocery shopping and go to their job, that they’re safe,” he said. “The United States simply isn’t there. Until we have the contact testing and tracing, we just won’t get there. The Fed knows this, which is why they’re saying they’re not going to raise rates until 2022.”

Of course, the gold market didn’t need the Fed’s latest forecast as the precious metal still enjoys strong bullish sentiment. At the start of the week, Goldman Sachs reiterated its optimistic stance on gold. The bank said that it sees prices pushing to $1,800 within the next 12 months. That price target goes up to $2,000 if inflation picks up.

According to Kitco’s Allen Sykora, research firm Metals Focus is also placing their bets on gold going through $1,800. This is an article you need to read.

“Of course, it won’t be a straight line. You will have bouts of profit-taking, as you would expect, as well as investors buying into momentum. I think it will comfortably break through $1,800 an ounce,” said Philip Newman, director and a founding partner with the London-based consultancy firm.

With gold prices going up, the critical question some investors are starting to ask is how much gold should I hold?

Tim Shaler, chief economist at iTrustCapital, said that generally, 10% of a portfolio should be in gold.

“A 10% allocation to gold makes a lot of sense because gold has a very low correlation to the overall stock market and to the overall bond market and how portfolios decrease risk at a given return expectation,” he said. “Ten percent is enough to create a low, a correlation factor within your portfolio, but it’s not so high that it introduces new risk caused by fluctuations in the gold market itself.”

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