Investors should be prepared to buy gold during any price declines as policymakers worldwide grapple with economic stagnation and deflation, said strategist Michael E. Lewitt.
The yellow metal has declined by 12 percent to about $1,135 an ounce for the 12 months ended Aug. 31 with the expectation that the Federal Reserve would begin raising interest rates this year for the first time
since 2004. A rate hike would boost the value of the U.S. dollar in relation to precious metals and foreign currencies.
Lewitt said investors need to be prepared for the likelihood that the central bank maintains loose monetary policy, possibly keeping rates low for extended periods after small hikes.
“The biggest factor that could upset the current course of markets would be a potential change in Fed policy that weakens the dollar,” he said in this month’s edition of his Credit Strategist newsletter
. “Nobody should underestimate the cowardice or incompetence of the Federal Reserve.”
Gold more than doubled from 2008 to 2011 as the global economy suffered the worst recession in 80 years and central banks responded by flooding markets with dollars, euros and yen. The yellow metal
gradually fell about 40 percent from the peak of $1,923 an ounce while business activity recovered and investors shifted money into higher-yielding assets.
“Gold continues to be unloved, which I view as a reflection of investors’ complacency and/or ignorance of actual global monetary conditions,” Lewitt said. “Those who know better should use current price weakness to add to their positions.”
He recommended the Central Fund of Canada
, the Sprott Physical Gold Trust
or physical gold as the best ways to allocate money to precious metals.
“The dollar is the single most important financial instrument in the world for investors to monitor,” Lewitt said. “Unfortunately, along with all other fiat currencies, it continues to be actively debauched by central banks with no end in sight. For that reason, regardless of what happens, investors should continue to buy gold and save themselves.”
Lewitt is cautious on stocks, estimating that the S&P 500 Stock Index
will end the year at 1,875 to 1,900. That would be a 3.7 percent to 4.9 percent decline from the benchmark’s closing level of 1,972 on Aug. 31.
“Investors buy this dip at their own risk. I recommend keeping your powder dry and, as I have been advising all year, hedging your long positions against further market declines,” he said. “The conditions that caused this sell-off have not dissipated – China’s economy and markets are still in trouble, commodity prices are still weak, the dollar is still strong, and third quarter U.S. growth seems to be fading.”
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