How much money is that crisp $20 bill in your wallet worth? Depending on the day and time, it could be more than twenty dollars—or less. That’s because central banks constantly tinker with interest rates to manage inflation and drive people to spend money rather than keep it. The value of the dollar impacts every commodity on the planet, directly or indirectly.
How Do Interest Rates Affect Gold?
Since gold is a non-interest bearing asset, this means that in a risk-on economy, gold loses attraction to higher yielding investments. However, in the current tumultuous economy, the opposite effect is that investors may choose precious metals (for which no interest rate exists) rather than currency—which is what the past few months have shown. The Federal Reserve’s further decisions on interest rates continue mean a lot to the average gold investor.
Fed’s Recent Hike Sparked Gold
Can you remember what you were doing seven years ago? Perhaps it was a better time, or perhaps you were one of the average Americans who watched their property values plummet. The Fed went seven years between raising interest rates in the hopes that ultra-low interest would spur investment and raise the country out of the Great Recession.
After nearly a full decade of cheap money, the nation’s central banking gurus have decided that next-to-nothing is no longer sound fiscal policy, raising interest rates in December of 2015. That sent a surge through the gold community, rallying from six-year-lows of $1,046 per ounce to climb all the way up to high-water marks of $1,375 per ounce—a figure that would have seemed like a dream just a year ago.
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After waiting such a long time for the first rate hike, Janet Yellen and her team of policymakers now face the decision to raise rates again to spur more long-term investment. If a second hike goes through, gold has the chance to climb higher still.
“Fed Speak” – Will They Or Won’t They?
The decision to raise interest rates does not come lightly to those who watch their net worth fluctuate on the Fed’s whims; it’s a thornier subject than “up” and “down.” The Fed has set its own target of 0.5% growth rate for interest this year, a target that they likely cannot hit without a rate hike in the immediate future. 1
With uncertain expectations for rate hikes through 2017 and even 2018, this might be the last chance for gold prices to get a big, beautiful bounce. Some financial analysts believe that the relatively cool late-summer performance of gold owes a lot to the hemming and hawing of the Fed; lack of decisive action led investors to play it safe rather than double down on the expectation of a fresh hike.
There’s plenty of ambiguity in fiscal policy, but make no mistake: the Federal Reserve’s capability to raise interest rates creates an opportunity for non-performing assets like gold. However, the lack of certainty on the Fed’s behalf (especially in comparison to last winter) prevents gold’s current bull market from enjoying a new uptick. Investors should carefully determine how gold is likely to perform considering the factors at work, and then buy gold accordingly to suit investment needs.