The top gold strategist at $4.3 trillion State Street shares 3 reasons why gold could reach $2,700 by year-end — and how he invests in the metal

The possibility of a rate cut in the next six months has been looming over the economy, which should boost the price of gold, Milling-Stanley said. June CPI data was favorable, showing a drop in inflation and increasing the likelihood of lower interest rates.

Since the implementation of zero-interest-rate policies after 2008, gold has historically performed higher in months when the Fed cuts rates, as shown by the graph below.

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US dollar depreciation will also push gold prices up, he said. As interest rates decrease, demand for the dollar will go down as investors look to buy higher-yielding currencies or gold.

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“The dollar is liable to come down in value as soon as we start to get interest rate cuts,” Milling-Stanely told Business Insider in a July 10 interview.

“I’m including gold as a component of the currency markets because it often behaves like one,” he added. “So if we get a rate cut in September, then I think the dollar will come down and gold will go up.”

Central banks worldwide are also bulking up their gold reserves. While governments have always been avid buyers of gold, with anywhere between 10% and 25% of total gold demand stemming from official reserves, dollar depreciation will spur even more gold buying.

“Central banks realize that they have something like two-thirds of their official reserves in dollar-denominated debt instruments and less than 5% of their reserves in gold, and they believe that’s a dangerous imbalance,” Milling-Stanley said.

He points to Nigeria as an example, a country that recently proposed increasing its percentage of gold holdings in foreign reserve assets from 4% to 30%.

Monetary policy notwithstanding, gold is likely to outperform in the current geopolitical background as demand for a more protective investment increases. Milling-Stanley pointed out several areas of concern, including the ongoing war in Ukraine, escalating conflict in the Middle East, tensions between China and Taiwan, and the upcoming US presidential election.

“It’s going to get uglier for the next few months,” Milling-Stanley predicted. “All of those things create this climate of uncertainty, nervousness, you might even call it anxiety in the minds of investors. And I think all of those things increase the attractiveness of gold for investors.”

The stock market is sensitive to geopolitical tensions as supply chains and international trade become disrupted. In periods of high equity volatility, gold has far outperformed the market, yielding positive returns while the rest of the market declines.

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All of these factors will lead to increased demand for gold. Gold prices hit a record high earlier this year at over $2,400 per ounce in May, and Milling-Stanley believes there’s still plenty of room for prices to climb higher. He estimates a 50% probability of gold prices ending the year in the $2,200 to $2,500 range and a 30% probability of prices rising between $2,500 and $2,700. “We’re 80% confident that gold will either stay where it is or go higher,” Milling-Stanley said.

How to invest like an industry veteran

Milling-Stanley recommends allocating anywhere between 2 to 10% of one’s portfolio to gold to get protection from economic instability and enhance returns.

“I’ve had a 5% strategic allocation to gold for a very long period of time, probably 40 years,” Milling-Stanley said. He’s increased his allocation to as high as 20% in the past.

One of the most tangible ways to invest in gold is to simply purchase the physical metal. Gold coins or bars can be purchased at a local coin dealer. While Milling-Stanley does have a collection of gold coins, he points out that this isn’t the most efficient way to invest, as there’s less liquidity and a need for storage insurance.

Instead, investors can gain exposure through a variety of gold ETFs. The largest and most popular one is the SPDR Gold Shares ETF (GLD), which Milling-Stanley helped create 20 years ago. Other cost-efficient options include the SPDR Gold MiniShares Trust (GLDM), iShares Gold Trust (IAU), Goldman Sachs Physical Gold ETF (AAAU), and GraniteShares Gold Trust (BAR).

Gold mining ETFs such as the VanEck Gold Miners ETF (GDX) and iShares MSCI Global Gold Miners ETD (RING) also provide exposure to the metal. While Milling-Stanley has invested in these many times before in the last half-century, he raises some precautions about these assets.

“They can be a good investment, but it’s important to do your due diligence. And it’s important to remember that they don’t necessarily follow the gold price 100%,” he caveats. The performance of mining stocks and ETFs is dependent on the financial management team and are more correlated to the broader equity market, decreasing the protective hedge that investing directly in gold provides.