(Kitco News) - With so much liquidity already in the monetary system, it doesn’t matter if the Federal Reserve tapers its $85 billion bond-purchase program said an analyst at the National Bank of Canada.
Paolo Lostritto the director of equity research in mining and metals for National Bank Financial, in Toronto, said he is expecting inflationary pressures to be correlated to money velocity and despite short-term volatility, expects prices to hit $1,800 in the long-term.
Despite, his long-term bullish forecast, Lostritto is expecting gold prices to remain weak in the near-term as the market digests positive real interest rates, strong redemptions in gold-backed exchange-traded funds and deflationary concerns. In a report released July 21, Lostritto lowered his 2013 forecast for gold prices to $1,300 an ounce from $1,600 an ounce. He also expects the price to remain in that area through 2014.
Although prices can move lower in the near-term as volatility remains high, Lostritto said it is important to keep an eye on the long-term price action.
“If you have a three to five year horizon then I think now is a great time to buy,” he said.
Lostritto said his models, related to inflation, money supply, demonstrate it is only a matter of time before prices push higher in the long-term. He added inflation will pick up when the monetary velocity starts to increase – the churning of the supply already in the system.
“I think the Fed has bought itself about two years before inflation shows up because it is the least dirtyshirt out there,” he said in an interview with Kitco News.
Lostritto said there is a big misconception that as soon as the Fed stops its bond purchasing program the excess liquidity will dry up.
Since inflation hasn’t shown up in the economy, investors aren’t paying attention to the excess liquidity, he said. But inflation has been nonexistent because banks and corporations have been hording their cash, which has caused a dramatic drop in the money supply, he added.
“We’ve been in a classic Keynesian liquidity trap,” he said. “We could be near the tail the end of that liquidity trap.”
Lostritto looked to automotives to describe the current economic situation. The Fed’s quantitative easing policies have filled up the gas tank and now corporations -- feeling a little bit more optimistic about the improving economy -- are ready to hit the gas, which will drive up inflation, he said.
Looking forward, Lostritto said it is important investors pay attention to the velocity of the monetary supply in the system. He added the fact that the S&P 500 continues to hit all-time highs is an indication that velocity is starting to pickup.
By Neils Christensen of Kitco News nchristensen@kitco.com
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