(Kitco News) – The gold market is holding its ground around $1,800 an ounce, and one chief investment strategist is expecting the price to remain range-bound as the Federal Reserve looks to shift its monetary policy and reduce its monthly bond purchases.
In an interview with Kitco News, Kristina Hooper, Kristina Hooper, head of investment strategy at Invesco, said that she expects the Federal Reserve to announce its tapering plans after next week’s monetary policy meeting.
Hooper’s hawkish outlook on U.S. monetary policy comes after many have dismissed the idea the Federal Reserve will be ready to launch its plans as early as next week. Many analysts have pushed the tapering plan to December. The shift in expectations came after the August nonfarm payrolls report, which showed only 235,000 jobs were created last month, significantly missing expectations.
Despite the disappointing employment numbers, Hooper said that one can still make a case for tapering.
“This is not your traditional weak jobs market,” said Hooper. “It’s an unusual jobs market, but it would not argue for maintaining this level of accommodation. In general, this is a rather positive environment. So I think the Fed is definitely justified in announcing tapering soon and then beginning it soon.”
Hooper said that she is neutral on gold with the Fed looking to reduce its monthly bond purchases; she expects the precious metal to remain caught in this sideways pattern.
Although not bullish on the gold price, Hooper is also not bearish. She added that monetary policy will continue to be an essential support for the yellow metal.
“This is an environment that ticks a lot of the boxes for the gold market. You’ve got a very accommodative monetary policy; even when the Fed starts tapering, it will still be adding to its balance sheet. When it’s done tapering, the balance sheet won’t be going down anytime soon. And, of course, rates are at ultra-low levels. In general, monetary policy is still very, very supportive,” she said.
Hooper also noted that just because the Federal Reserve is looking to reduce its bond purchases doesn’t mean they are ready to raise interest rates.
However, if the economic recovery continues at its current pace, Hooper said that she could see the central bank raising interest rates by December 2022.
“If things continue to go as they are now. I think it a rate hike is justifiable. But the good news is the Fed doesn’t have to make that decision right now. They can follow the data carefully and react to it,” she said.
Although Hooper sees gold stuck in neutral, she added that there will be periods of episodic volatility. She said that some of the sparks that could ignite a new short-term push higher are the ongoing geopolitical and domestic political uncertainty.
One issue Hooper said that she is watching closely is the looming debt crisis in the U.S. Last week, in a note to Congress, U.S. Treasury Secretary Janet Yellen said that Treasury Department could run out of cash by October. She warned politicians of “irreparable damage” if the debt ceiling is not raised in time.
Hooper said that is a significant issue the U.S. government has to deal with. However. she added that there had been so many last-minute deals made that there is a lot of complacency in the market. She said that investors will take this more seriously as the deadline looms closer.
While gold prices are not expecting to go anywhere anytime soon, Hooper said it is still an important asset to hold in a portfolio. She added that it is a critical diversifier, hedge and general insurance policy against market uncertainty.
Hooper explained that inflation remains a significant concern even if price pressure are starting to fall. She said that there is still is a risk that the Federal Reserve gets its monetary policy wrong and creates a period of stagflation.
Just being diversified and having a hedge against tail risk scenarios is a compelling enough reason to have some exposure to gold,” she said.