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Persistent inflation will force the Federal Reserve to aggressively raise interest rates through the rest of the year, maintaining solid headwinds on gold and silver prices, according to a group of fund managers. Growing physical demand for gold indicates positive long term movement.In a panel discussion during the London Bullion Market Association’s annual precious metals conference, participants generally agreed that gold and silver prices could struggle through the rest of the year as rising interest rates and solid momentum in the U.S. dollar keep investment capital on the sidelines of the precious metals market.

However, sentiment on the stage was still relatively bullish for gold and silver’s long-term potential, despite the short-term headwinds.

The panelists agreed that inflation remains a global problem and the Federal Reserve has to maintain its aggressive monetary policy stance to cool down and reset the global economy. John Reade, chief market strategist at the World Gold Council and moderator of the discussion, said that in the current environment, he doesn’t see a scenario where the U.S. dollar weakens anytime soon.

Although the Fed will continue to raise interest rates through the end of the year, some panelists questioned whether it will be able to achieve its goal.

Darren Botha, portfolio manager at DRW Investments, said that while it’s unlikely the Federal Reserve will pivot on interest rates anytime soon, he doesn’t expect monetary policy to be high enough to cool down inflation.

Botha said that massive government debt will eventually force the Federal Reserve to abandon its tighten cycle.

“The central bank will not be able to get interest rates up to where they need to be to get inflation under control,” he said. “When rates eventually peak, that will be a good environment for gold.”

While most panelists were generally long-term bullish on gold, there was one bear in the mix. Kathleen Kelley, founder and CEO of Queen Anne’s Gate Capital, said she expects weak investment demand to weigh on gold prices.

Kelley noted that during the pandemic, investors flocked into gold-backed exchange-traded funds. Holdings in gold ETFs hit record highs. However, she added that a lot of that investment capital is underwater.

She said continued outflows in gold ETFs could drive prices back to $1,300 an ounce.

Although the panelist generally agreed that the precious metals paper markets were weak, physical demand for gold and silver remains has been exceptionally strong, particularly in Asia and the Middle East.

Physical demand is expected to provide some support for the precious metal and eventually attract new investment capital, according to the panelists.

Amir Ravan, Portfolio Manager at Bluecrest Capital Management, said that there is a solid block of nations buying gold and trading amongst themselves to diversify away from the U.S. dollar.

Ravan added that gold is an attractive global currency because it has no “geopolitical taint.”

Ravan also said that while gold underperforms against the U.S. dollar, it makes sense to hold it in nondollar terms.

Matt Slater, global head of precious metals forwards and physical trading at UBS, said that physical demand for gold and silver shows how much potential is in the market.

Slater added that refiners worldwide are working flat out to keep up with demand and silver is flying around the world to meet demand. Because of high transportation costs, silver is traditionally shipped globally by boat.

“Gold is ultimately a physical market and that tells you what the trend is,” he said. “We just can’t make enough gold and silver products.”

Slater added that despite the disappointing performances in gold and silver, the precious metals will remain an attractive safe-haven asset.

“Having some gold allows you to sleep at night,” he said.

Botha said that he also sees solid safe-haven demand for gold supporting prices.

“The Traditional 60/40 portfolio is having its worst year in 100 years, so there is a case to be made for holding other assets like gold,” he said.

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