The Fed Rate and the Effect on Gold

The Fed Rate and the Effect on Gold
The Fed Rate and the Effect on Gold

The Fed Rate and the Effect on Gold

It is sufficient to say that the upcoming Fed Rate discussions have everyone tied up in knots. Views, opinions, and predictions are causing prices to rise and fall across the board. Each day brings a new verdict. However, as the days draw nearer, investors seem to be settling down. Furthermore, everyone seems to agreeing on a similar conclusion. This general consensus has resulted in a particular outcome – an increase in the price of gold. Let’s take a look at why this happened just a short while ago.

The Current Consensus

So, why are people buying gold once more? Well, this is due to the increase in the current price of the yellow metal. When last checked, spot gold was trading up 0.3 percent at $1,322.5 for an ounce. This was in response to the drop in price of the U.S. dollar against several other currencies. This happened as the world’s traders and investors wait with bated breath about the interest rates in the United States.

This begs the question, why the sudden change of heart? Why have traders begun to buy gold again? Well simply put, it is because people have begun to have more faith in the Fed rate decision. While there was a great deal of anxiety regarding the hike, most investors do not feel as though it will happen. In fact, current belief is that there is only a fifteen percent chance that the Fed will increase the rate in September. Other entities such as Goldman Sachs, however, are a little more cautious about the decision in December, after the US elections. Goldman Sachs has increased the probability of a hike to about 40 percent towards the end of the year. Nevertheless, the increased optimism in a favored verdict has everyone happy.

Gold In US Dollar per ounce - (GOLD)
Gold In US Dollar per ounce – (GOLD), source

What Does This Mean For Gold?

The higher the interest rate, the more expensive it is to hold the yellow metal. This is what made some people wary about the commodity. However, with renewed faith in the idea that the interest rates won’t increase, people are investing in the precious metal once more.

Of course, should the interest rates spike, there is still no hard evidence to prove that the yellow metal will take a hit. This is because there is not a lot of correlation between an increase in the Fed rate and the prices of the precious metal. Furthermore, when you take the previous performances into consideration, the yellow metal has held strong. In the past hike cycles, the precious metal dropped imperceptibly before rebounding once more. Therefore, it is quite premature to make any hasty judgments just yet.

The bottom line appears to be that traders and investors have not seen the last of this precious metal. Particularly not for this year. The price of the precious metal has held quite well since the announcement of Brexit. As long as it hovers between $1,300 and $1,310, it will be good news for short term traders interested in this commodity. So far, however, the future looks good even in the face of the upcoming Fed discussions.