For decades, gold has proven to be a safe-haven asset capable of weathering economic downturns without significant price-reductions. Now that the global economy is in a slump and is predicted to enter a recession in the near future, analysts say that gold still remains a solid investment even after the Federal Reserve hiked interest rates by the highest percentage since 1994.
Invesco’s chief investment strategist Kristina Hooper stated in a recent interview that even though the Fed had raised interest rates by 75 basis points, the largest hike in almost three decades, gold prices will stand their ground.
The Fed’s move was indicative of just how much it was worried by inflation, Hooper said, adding that many investors saw it as a red flag that America’s Central Bank was pushing the country’s economy into a recession. The U.S. Federal Reserve has signaled that this historic interest rate hike won’t be a one-off; there may be another 75-basis point hike in July, and the Federal Funds Rate could reach as high as 3.5% by December.
Although the traditional argument is that the Fed’s increasingly hawkish monetary policy will cause rising yields, which is bad for gold, Hooper says that investor fear may push investors to gold as a safe haven for their equity amid fears of rising recession and bearish markets.
The Federal Reserve’s actions, which have caused experts to worry that it is leading the economy to a recession, have changed the relationship between interest rates and gold, Hooper said during her interview. She sees equity markets getting weaker while gold prices increase through the year. However, Hooper notes that the investor fear driving gold prices may be “a little overdone.”
Yes, the threat of recession still looms, but if the labor market remains strong and Americans can keep their jobs, we could avoid a recession, Hooper noted. She added that rather than a recession, the economy could go into a slowdown that results in a relatively small number of layoffs and fewer job openings.
Hooper also stated during her interview that the real fear among investors and consumers is an extended period of high inflation. According to a recently conducted consumer sentiment survey, consumers expect inflation to remain at 3.3% for the next three to five years.
She adds that the Fed will continue to hike interest rates aggressively to combat the inflationary environment. But in the meantime, gold investors can be confident that their investments will retain their value and that the stocks of mining companies such as Hecla Mining Company (NYSE: HL) will keep performing well for the foreseeable future.
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