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What should gold investors do when US Fed starts raising rates?

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What should gold investors do when US Fed starts raising rates?

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The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.

What should gold investors do when US Fed starts raising rates?
Recently as inflation rates are rising all over the world due to the covid-19 pandemic and the whole world was expecting a rise in federal bank’s interest rates so, in the latest FOMC meeting, Federal Reserve officials intensified their battle against the hottest inflation in a generation by shifting to end their asset-buying program earlier and signaling they favour raising interest rates in 2022 at a faster pace than expected.
The central bank recently that it will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.
Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate, after holding borrowing costs near zero since March 2020.
Generally, it is a belief of many analysts that gold prices have an inverse relationship with interest rates. When the interest rates fall, people don’t get good returns on their deposits causing an increase in gold demand and so the price. On the other hand, when the interest rates rise, people sell their gold and invest in deposits to earn high interest leading to a drop-in demand and price.
Relation of Fed Interest Rate hike with Economy
The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.
When there is an increase in the Interest rate, the cost of borrowing goes up too, and this increase starts a series of cascading effects. In essence, banks raise their interest rates for consumers and businesses, and it costs more to buy a home or finance a company. In turn, the economy slows down as people spend less.
The economy has to deal with the pandemic, and that’s a big contingency that may continue to grow.
Raising interest rates in very small increments as a quarter percent, so shouldn’t have a dramatic effect on slowing the economy. But if we get a combination where you continue to have a rising number of COVID cases globally and interest rates going up, that could slow down the economy even more.
Relation of Fed Interest Rate hike with Inflation
Inflation may continue to rise because parts of it are transitory such as the supply chain bottlenecks work them through. A lot of inflationary pressures are derived from items that are going to stay high. Oil did come down a bit but now it's moving back up. Rising oil prices impact citizens' lives because steep fuel prices lead to higher inflation. It affects the prices of other essential goods. The value of essential commodities like food, medicines, etc.
Even if the Fed gets it right and it slows down the Inflation, it may take at least 3 to 4 years to make inflation come down, it is a multi-year and not a multi-month process.
Relation of Fed Interest Rate hike with gold
Interestingly FOMC made the distinction between when they would begin the lift-off the interest rate where it would begin in the early next year January or February, whereas chairman Powell hinted in the press conference that the first hike to come until June of 2022.
Without raising interest rates until the middle of the year, if inflation continues to go up higher, we may see gold react to the bullish side.
But if inflation stays the same or goes down due to the tapering process, then we may see it still range-bound or even lower, this is because of the headline-driven market, of course, markets move on a fundamental basis but these is the headlines that jerk the market violently and we have gotten a lot of very interesting headlines this year. If we get that same kind of action next year, we could get that effect.
Effect of Fed Interest Rate on Gold Price
The author, Vidit Garg, is Director at MyGoldKart. The views expressed are personal
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