Lee Munson, president and CIO of Portfolio Wealth Advisors, said gold is one of the last assets to rise because of inflation fears, as the mechanics of the precious metals market change.
Investors should not rush to buy gold because of fears of a crisis or hyperinflation, Munson said in an interview with Goldcorp News (Kitco News). Gold now depends entirely on the degree of expansion of the Federal Reserve balance sheet. He even believes that the gold price could rise to $2,200 before the Fed starts raising interest rates:.
“I’m not buying gold in response to a crisis, but when there is a crisis, the Fed will print money like it’s the end of the world in a frenzy, and only then will I consider increasing my gold holdings.”
Manson distinguishes between gold prices climbing with balance sheet expansion and its changing with inflation concerns, because not all countries end up in hyperinflation due to massive money printing. But gold is a winner either way. In this regard, he explains.
“In my opinion, while gold moves in relation to inflation, the two are not really very closely linked. One of the biggest misconceptions about gold is that people go around saying that gold is a hedge against inflation, but that’s not necessarily true.
In the 1980s and 1990s, inflation was very high, yet the price of gold also fell. However, when countries outside of the United States experience hyperinflation and their currencies are devalued, gold is a store of value. This has been true throughout history. That’s why people buy it – for fear of devaluing their own currency.
For investors to better understand gold price movements, they need to pay attention to the expansion of the money supply. The expansion of the Fed’s balance sheet is what’s really driving the gold price up relative to inflation.”
And right now, the U.S. is in a period of money printing that is not expected to end until the first half of 2023. Manson notes.
“If the future money supply remains as it has in the past, then gold will still have some advantages after the crisis.”
In addition, whenever there is a recession, the Fed has to keep interest rates low for longer, considering that all businesses and households are indebted.
Inflation is indeed a risk, he added, but people are overreacting to real price pressures. He said.
“Inflation of up to 3 percent is alarming. I think a lot of people are reminded of the inflation of the late 1970s and early 1980s, when the price of gold peaked. But I don’t think this one will be like it was back then.”
The U.S. Treasury and the Federal Reserve are more worried about deflation than inflation, and they just want to see if the U.S. economy can exceed and stay above the 2 percent inflation target for several quarters in a row. Manson stated.
“The Treasury and the Fed need to keep interest rates low to continue to stimulate the economy, and they are now worried about deflation, not inflation, which is a change in the system. The gold market mechanism has also changed as the Fed wants to see if inflation can reach 2%, 2.5%, 3% for more than a month.”
Many investors believe inflation will rise sharply and the Fed will overreact. Manson doesn’t think so, saying.
“There’s a lot of evidence that gold moves with the expansion of balance sheets. In many countries, under different circumstances, the expansion of their balance sheets has led to currency depreciation, which leads to hyperinflation. This has been more pronounced in the United States. It is more about how much money is being printed, which would not be necessary if there was core inflation. That’s why the dollar will continue to be depressed.”
But Manson said the Fed is unlikely to lose its grip on inflation because they control money and interest rates.
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