Gold Will Do Well With Fed Focused On 'Symmetric' Inflation - Axel Merk
(Kitco News)- Althoughinterest rates are expected to move higher in June, one fund manager said thatthe currency environment is still positive for gold as the Federal Reserve hasno intention of getting in front of inflation pressures.
Forgold investors, the key phrase from the Fed’s statement on Wednesday shouldhave been: “Inflation on a 12-month basis is expected to run near theCommittee’s symmetric 2 percent objective over the medium term,” Axel Merk,chief investment officer and president of Merk Investments, told Kitco News inan interview focused on the Fed’s monetary policy decision.
“Thecommittee is emphasizing that it is okay if inflation rises above its 2%target,” Merk said. “This is a strong indication that the Fed doesn’t believeit has to get ahead of inflation. I think gold will do well in this environment.”
Merk’scomments come as gold has managed to bounce off its recent four-month lows butstill remain at the bottom end of its current trading range. June gold futures last traded at $1,315.60 an ounce, up 0.76% on the day.
Merkexplained that rising inflation pressures will ultimately keep real interestrates low even as nominal rates rise. Gold can benefit in this environmentbecause as a non-yielding asset it has relatively low opportunity costs.
“It’snot like there is going to be runaway inflation, but in a context of valuation,gold is worth considering compared to other assets,” he said.
But,interest rates are only one part of the investment argument for gold. Merk saidthat he also likes the yellow metal in an environment of falling equitymarkets. He added that investors are starting to realize that equities arebecoming expensive as volatility rises.
Whilerising inflation is long-term bullish for gold, Merk said that investors stillneed to be careful of short-term impact, which is also a stronger U.S. dollar.A recent surge in momentum, which has pushed the U.S. Dollar Index to a new2018 high, has been the biggest weight on gold prices.
However,Merk said that current currency market moves are just short-term noise. He added that in the long term, he still seespotential for the euro to rise against the U.S. dollar as the European CentralBank will be forced to tighten monetary policy.
By Neils ChristensenFor Kitco News
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