(Kitco News) – The gold market is not paying attention to U.S. inflation or U.S. interest rates as investors aren’t worried about opportunity costs in a world with unprecedented geopolitical and economic uncertainty, according to one market strategist.
Thursday, in an interview with Kitco News, Kristina Hooper, chief investment strategist at Invesco, said that despite March’s hotter-than-expected inflation data, she expects the Federal Reserve is on track to cut interest rates in June.
“Disinflation is a very imperfect process,” she said. “This process is not perfect, and it’s not pretty, but when I look at the mosaic of data, disinflation is still underway.”
Hooper added that even if the Federal Reserve does delay its easing cycle to later in the year, the central bank has made it clear that interest rates are coming down. She added that this position is a big reason why gold’s opportunity costs have not dissuaded investors from jumping into the marketplace.
As a non-yielding asset, gold’s opportunity costs rise as bond yields rise. Wednesday, the U.S. Consumer Price Index rose higher than expected to 3.5% in the last 12 months. Stubborn inflation pressures caused markets to price out a June rate cut, pushing yields on U.S. 10-year notes to a five-month high above 4.5%.
Despite a sharp rise in bond yields, gold continues to trade near record highs. June gold futures last traded at $2,382.20 an ounce, up 1.45% on the day.
“I don’t think gold is going to flinch much if, in fact, the Fed doesn’t cut rates in June. Whether they cut in June or later in the year, interest rates are moving lower,” she said. “From my perspective, there are a lot of drivers for gold, and lower down on the list are opportunity costs because rates are going to be cut.”
Hooper said that the most significant factor driving gold is that it is now seen as a hedge against fiscal excess as debt explodes higher in the U.S. and worldwide.
Along with growing debt concerns, Hooper also said that gold remains an attractive asset among central banks as the global currency market becomes more divided.
“Although there are concerns about the health of the U.S. dollar, it has not resulted in the rise of another global reserve currency, but there has been a fragmentation of the currency market, and the biproduct has been a rise in popularity for gold,” she said.
Although gold has made some significant gains in the last month, Hooper said she sees further potential for the yellow metal as there is still a lot of investment cash on the sidelines.
“One could say that valuations for gold are a little frothy, but we can say the same thing for the U.S. stock market. But when you look at the factors driving gold’s popularity, you can come to a very different outcome, which is that there is still a lot of upside.”
Although Western investors have continued to liquidate positions in gold-backed exchange-traded products, Hooper noted that physical demand for the precious metal has been relatively robust. Earlier this week, equity analysts at Wells Fargo estimated that massive retailer Costco sells between $100 and $200 million in one-ounce gold bars a month. At the same time, Hooper said that Asian investors continue to dominate the gold market.
“The reasons why investors are buying gold aren’t going away anytime soon,” she said. “Typically, in a scenario where there are multiple reasons to buy, and demand is coming from different areas, there tend to be longer legs in these rallies.”
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