Most of the recent U.S. economic reports have shown positive data, leading investors to speculate that the Federal Reserve may finally decide to start raising interest rates from their rock bottom levels. This could be bad for gold prices initially, as gold does not pay interest. However, global tensions and strong demand in the physical gold market, especially from China, could signal a prime buying opportunity.
According to the Wall Street Journal, “Gold prices fell on Monday as investors focused on the impact of recent upbeat U.S. economic reports on future monetary policy action from the Federal Reserve.” This continues the trend from last week of investors shifting from gold back into the stock market. Gold investors are very familiar with this trend, as this happens any time there is positive economic news.
Savvy gold investors know not to panic, however, as this is just speculation and there are many other factors to consider. First off, it is not a foregone conclusion that the Fed will raise rates.
“The timing is there in terms of the Fed wanting to raise interest rates, the question is will they be able to?” Ira Epstein, a broker with Linn & Associates in Chicago, told the Wall Street Journal.
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There is also the upcoming release of the U.S. employment report on Friday, which should have a big impact on the Fed’s decision.
“If the data suggests further pressure on average hourly income and increased strength in the labor market, the Fed may have its last window to move, which would have an initial negative impact on gold, but given the China issues, probably a buying opportunity,” Peter Hug, global trading director with Kitco Metals Inc., said in a note to clients obtained by the Wall Street Journal.
Concerns about China’s economic health had led to a nice rally in gold prices recently and their issues show no signs of abating anytime soon. Which is why gold may take a hit with the Fed decision, but may still remain a strong investment given the state of the economies of other global powers.
Another positive sign for the future of gold prices is the state of global demand for physical gold. Since late July, large Indian and Chinese retail investors have increased their buying of the yellow metal. This is significant, since the two countries make up about 50 percent of the world’s retail demand for gold.
“Both gold investments and jewelry buying is seeing some recovery from a low base,” Jammy Chan, head of Greater China for Gold Bullion International, told the Wall Street Journal.
So despite the impact of the looming Fed decision on interest rates, there are still many reasons to feel good about physical gold.