Having already provided a tailwind for gold prices prior to the pandemic, the Fed’s latest announcement may drive the metal even higher. Find out why here.
Before the pandemic hit, gold had been on a steady upwards trend since the start of last summer. Although the metal rested on plenty of solid fundamentals, the momentum shift occurred as the Federal Reserve decided to slice interest rates in succession, joined by central banks around the world. The massive amounts of stimulus issued in response to the crisis, along with a prolonged zero-rates policy, also played a key role in helping gold breach its all-time high and climb above $2,000.
Considering the latest announcement by Fed Chair Jerome Powell and gold’s response to it, the Fed’s place as an exceedingly powerful driver of gold prices appears well-set. On Thursday, Powell announced that the Fed’s inflation rate could exceed 2%, a revelation with numerous positive implications for gold.
Inflationary expectations were already running rampant before the trillion-dollar stimulus, and the announcement that Fed officials aren’t too concerned about possible spikes in inflation are likely to play heavily into that role. Likewise, the purpose of the statement appears tied to the Fed’s desire to keep interest rates low, which some consider to be perhaps the most powerful tailwind for gold.
Having held onto the $1,940 support level for the better part of the past two weeks, gold was quick to respond, hitting a high of $1,973 during Friday’s trading session. Delano Saporu, founder of New Street Advisors, shared some of his views on gold’s current state, as well as what investors can expect from the markets moving forward. As Saporu and many other analysts noted, those looking for a safe-haven asset, be it as a hedge or otherwise, have nowhere to turn with the bond market being in dire strides. These investors are likely to pour into gold, not only as a source of safe returns but also due to concerns over the ever-increasing money supply.
Nancy Tengler, chief investment officer at Laffer Tengler Investments, echoed Saporu’s sentiment, highlighting that the strong fundamentals that have drawn investors to gold are still in place. Besides the addition of a sluggish economic recovery with plenty of concerns, negative real rates and ballooning government debt have been sticking out as red flags. The need to spur an economic recovery is likely to worsen the sovereign debt issue, which is generally viewed as a problem without a palatable solution.
Furthermore, Tengler also pointed to the uncertainty in the stock market, stating that only a few tech stocks aren’t high-risk plays right now. Noting that her firm called for a pullback when gold breached the $2,000 level, Tengler advised investors to buy the dip in gold whenever possible.