Gold Still Has A Path Higher As The Fed Doesn’t Raise Interest Rates

(June 14,2023- Chantelle Schieven)

(Kitco News) -The Federal Reserve won't be able to maintain its aggressive monetary policies for much longer because of the nation's growing debt burden, which will continue to support gold prices at record levels, according to one market analyst.

In a recent interview with Kitco News, Chantelle Schieven, head of research at Capitalight Research, said that gold prices could remain in neutral territory below $2,000 an ounce through the summer; however, she added that the Federal Reserve's current monetary policy stance continues to push pressure on global financial markets.

Schieven's comments come as the Federal Reserve leave interest rates unchanged in June but maintain its hawkish bias with a potential rate hike in July. However, Schieven said that the central bank's pause will likely mark the end of the tightening cycle.

"The global economy, because of growing debt burdens, can't afford these higher rates right now," she said. "Because of rising interest rates, the servicing costs for all this debt is just going up. At some point, all this debt will become distressed and that is where gold comes in."

It's not just government debt that investors have to worry about; Schieven pointed out that consumers and corporations are starting to struggle in a higher rate environment. She added that the economy hadn't felt the impact of this stress as consumers still have some savings to make their payments; however, conditions are starting to deteriorate.

"It's only been a year since the Federal Reserve started to aggressively raise interest rates and it's going to take some time before the effects are felt. It doesn't matter if you are upside down on your mortgage as long as you can still make your payment and you don't have to sell. But there are a lot of consumers who are sitting on mortgages that, in six months, could be considered distressed because they have to do something with it. The same with commercial real estate."

Although the U.S. economy has been fairly resilient in the current environment, Schieven said that a lot of the data the central bank is monitoring is backward looking.

"I think the data is going to show that the central bank should have stopped hiking a while ago," she said. "History shows that tightening cycles generally end because something breaks."

Schieven added that she expects the Federal Reserve's next move in monetary policy will be to cut rates at the end of the year as the economy falls into a recession. She added that she sees a 70% chance of a recession before the end of the year.

While a recession generally isn't favorable for gold, Schieven said that the Federal Reserve's response to support the economy should prove to be.

In the near term, Schieven said that she could see gold prices fall below $1,950 an ounce and potentially test support around $1,900 an ounce as markets continue to react to the Federal Reserve's hawkish bias.

However, she added that she sees any major correction in gold as a buying opportunity as she expects to see record highs by year-end. She said that she sees two scenarios where gold push to record highs.

The first scenario is if the Federal Reserve officially ends its tightening cycle and starts preparing markets and investors for a potential rate cut.

The second scenario is where the Federal Reserve's monetary policy causes financial markets to break; she added that she will continue to pay close attention to lending conditions in commercial real estate markets.

"I think the central bank is ready to hold rates here, but once a recession hits, they will quickly cut rates and stimulate the economy. By the end of the year, we could definitely see some new highs in gold," she said.