(Kitco News) - The gold market is once again in striking distance of $1,800. New momentum could propel it higher as markets could readjust their expectations regarding potential interest rate hikes from the Federal Reserve.
George Milling-Stanley, chief gold strategist at State Street Global Advisors, said that since June, investors and markets have been too aggressive when it comes to price in potential interest rate hikes.
"Federal Reserve Chair Jerome Powell made it very clear Wednesday that there is absolutely no link between reducing the balance sheet and potential interest rate hikes," he said.
Wednesday, the Federal Reserve, as expected, started to reduce its monthly bond purchases and the central bank expects the tapering process will be finished by mid-2022. However, following the monetary policy decision, Powell emphasized that the committee is not looking at rate hikes anytime soon.
"The policy is well-positioned to address the range of plausible outcomes. It will be premature to raise rates today. We want to see the labor market heal more," Powell said at a conference that followed the Fed's interest rate announcement," Powell said during his press conference.
Although Powell has said that he is in no hurry to raise interest rates, markets continue to price in a rate hike by June of next year. However, Milling-Stanley said that he expects those projections to shift through the new year, which should continue to support gold prices.
"There's certainly nothing that the Fed said that would prevent gold from going back above 1800 again," he said. "The market will now have to readjust its expectations after what Powell said. I'm looking forward to seeing what the market decides to do."
Adding to shifting interest expectations, Milling-Stanley said that he expects gold to attract more investor interest as equity markets continue to make record-high after record-high.
"Equity markets have been in a massive risk on mood for essentially the whole of 2021. The market has gotten way ahead of the real economy," he said. "Equity prices are not reflecting the fact that there are for-hire signs everywhere you look."
Milling-Stanley said that he is not expecting to see a major correction in equity markets. Still, a minor downtrend would be enough to bring gold's role in a portfolio back to the forefront, he said.
He added that gold right now is more attractive as a risk hedge than an inflation hedge.
Although rising inflation pressures are positive for gold prices, Milling-Stanley said that the outlook is still uncertain. He explained that in the last significant inflationary period in the 1970s, inflation was elevated for several years; he added that gold prices rose 16% during that period.
"For gold to go back to returning 15% or 16% a year, primarily as a result of high inflation, I think clearly inflation has to last above that level for more than four months," he said.
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