Fed Leaves Interest Rates Unchanged and Inflation Expectations Are Increasing

Bandaged Ben

Gold Market Discussion

Gold Battled Headwinds

gold barsEarly in the week gold struggled against a rising dollar index. It managed to hold just above $1,300. Some muted geopolitical fears after North and South Korean peace talks continued to put the brakes on gold as well. There was also some sell-off, which pushed prices down further. On Wednesday though, gold prices rose again. They continued to hold around $1,315 through Friday. Following a Federal Reserve announcement and as inflation expectations are increasing, buyers turned more bullish on gold. Gold prices also remained positive on Friday after a weaker than expected jobs report with fewer jobs created than were expected. While unemployment decreased, the labor force participation rate remained high.

Federal Reserve Leaves Interest Rates Unchanged This Week, Lifting Gold Prices

Fed Building

The Federal Reserve announcement on Wednesday was the most anticipated event for the week. Gold had dipped ahead of it, but bounced higher after the announcement that rates would remain where they are for now, with a rate hike in June still in the cards.

What this means for investors: A rise in rates this week might have kept gold prices down, since higher interest rates usually mean interest bearing assets are more desirable than gold. However when rates rise too fast, which is something many analysts have been concerned about for some time, it overheats the economy. As rates rise, consumer prices rise and spending often goes down if not offset by rising wages). This in turn leads to slower corporate spending and a slowing economy.

The significant reason that investors are concerned about the rate rise right now has to do with the 10-year U.S. Treasury bond. In just a few years, the interest rate on bonds has gone up more than 200 percent (from 1.4 to around 3%). The recent, heightened volatility in the bond market is making investors nervous, since such a rise in bond rates has historically been a harbinger of recession. Right now, the Federal Reserve is trying to cool off the market. However the interest rate balance is very fragile right now, and could collapse. When it gets out of control and rates rise too quickly (leading to recession) gold goes up as a safe haven asset.

Inflation Expectations are Increasing 

inflation pushing down the dollarA key part of the Fed announcement for gold prices was the indication that inflation expectations are increasing. Inflation has been low recently, and in low inflation environments, gold is often up against headwinds. On inflation, the Fed said that inflation has moved close to 2% and is seeing things as symmetric. This implies that the Fed is going to let inflation run on the higher side for a while before raising rates in an effort to maintain the balance between growth and interest rates.

What this means for investors: As inflation goes up, the dollar index goes down. This leads to higher prices for both gold and silver. While some inflation is healthy, out of control inflation leads to currency devaluation and collapse. For an extreme case of hyperinflation that is happening right now, look at Venezuela. The South American country has seen inflation quadruple in only two months to 18,000 percent. There is currently no end in sight, and the country is being ravaged by food and medicine shortages and skyrocketing prices.

Billionaire Converts Half of Assets into Gold

Naguib Sawiris
Billionaire Naguib Sawiris

The second richest man in Egypt, Naguib Sawiris, recently invested half of his assets in gold. The billionaire’s wealth is second only to his brother’s. He announced this week that he had converted half of his $5.7 billion assets into gold. Sawiris is apprehensive about the overvalued stock market, and sees gold surging. He also warned that there would continue to be crises coming out of the Middle East and China, and that gold will be the best protection.

What this means for investors: For the full interview, click here to see the video.

Stay Connected to the Markets. Subscribe Now to Get the Gold Market Discussion Delivered Every Sunday Directly to Your Inbox!

[mc4wp_form id=”1122″]

As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at  602-955-6500 or toll-free at 877-354-4040.

“I’ll be keeping a sharp eye on the market and I encourage you to do the same!”