The Federal Reserve has tipped its hand and its expectations to hold interest rates at the zero-bound range for the next two years is sapping hope of a sharp recovery out of financial markets and boosting gold prices.
Gold prices have recently pushed back to the top of their two-month trading range and in an interview with Kitco News, Christopher Vecchio, senior currency strategist of IG Group, said that in the current environment, it is only a matter of time before gold prices breakout to the upside.
“I do think that gold and silver here look as attractive as they've ever been in my limited experience over the past decade plus in this market,” he said.
Vecchio added that looking at the previous crisis, the 2008 Great Financial Crisis, gold prices didn’t start rallying in earnest until late 2009, during which inflation concerns started to pick up.
“As we move past the great lockdown and into the recovery phase of the coronavirus pandemic, that differential, that static interest rate held near zero coupled with rising inflation will produce an environment of negative, real yields,” he said. "And historically speaking, when real yields turn negative, that's when gold and silver tend to do the best.”
However, Vecchio also said that he is not convinced that the U.S. economy is on the road to recovery, even as state governments continue to ease lockdown measures. He said that people shouldn’t be focused on a second-wave COVID-19 pandemic, because the nation still hasn’t completely dealt with the first wave.
He added that uncertainty surrounding the long-term impact of the coronavirus will continue to weigh on economic growth.
“We need confidence and courage to get back on track. People need to know that when they go out to go grocery shopping and go to their job, that they're safe,” he said. “The United States simply isn't there. Until we have the contact testing and tracing, we just won't get there. The Fed knows this, which is why they're saying they're not going to raise rates until 2022.”
Looking at the current price action, Vecchio said that although gold has been stuck in a two-month holding pattern, he sees some resilient strength, even in the face of equity markets, which until the latest massive selloff had rallied a historic 40% off the March lows.
“The stock market has been on an incredible run and yet gold has stayed in this fight. One has to think that if things begin to sour, if we see this new data coming out, suggesting more spread of a virus. It looks like gold has a fighting shot to break through and punch through $1,747,” he said.
“My personal point of view is before looking to load into new positions, I'm waiting to see that this series of higher highs will resume. I want to see the $1,747 level punch through,” he added.