Gold Jumps After Fed Blinks, Again, on Rate Hike

Gold prices moved higher this week after the Federal Open Market Committee (FOMC), the committee of the Federal Reserve that determines interest rates, decided Wednesday to hold the line on any increase, and kept a neutral tone on whether or when it foresaw future hikes. The Committee’s next meeting is in June, though analysts suspect any increase is more likely later in the year, possibly even December.

The Fed’s been in a bind ever since it left the cheap money tap open too long following the 2008 Great Recession. Like any living thing, the U.S. economy simply adapted to near zero interest rates and reached a new equilibrium. Instead of acting when the economy was red hot in 2012 – 2013, our central bank stayed on the sidelines, expressing concern about rates but not actually doing anything about it. By the time the Fed was ready to start boosting rates, many of the world’s central banks were already headed in the opposite direction; lowering rates – even into negative territory, and embarking on additional stimulus. With the dollar already reaching new highs against foreign currency, the Fed became trapped by their own sluggish response.

Have Investors Already Priced in the Next Rate Hike?

One concern, with rates as low as they are, is that the Fed would have limited ability to respond to significant changes in economic conditions—a sudden shift up or down, for example. Yet overall it’s good news that the Fed is hesitant to roil markets by moving up too fast. That will give markets plenty of opportunity to price in rate hikes well in advance.

As far as the price of gold is concerned, if later this year we do end up seeing a hike, particularly a small one like we saw last December, a quarter-point bump isn’t likely to greatly impact the price of gold. There are just too many good reasons right now for investors to hold a percentage of their wealth in high quality bullion to think a meager rate hike, even if it caused a momentary dip in gold, would be any cause for concern.  With the world situation as it is most investors are glad of a tangible asset that can’t be trashed by a sudden foreign currency devaluation, or some other bolt out of the blue.

China’s Impact on Gold

China is good for gold prices for more than one reason these days. Their economy still weighs on global markets and the flight of foreign capital continues to put pressure on their currency, the yuan. This comes at a time of rising corporate debt among Chinese businesses, leaving open the possibility of a debt bubble collapse sometime in 2016. Moreover, the possibility of a sudden devaluation of the yuan, combined with nearly twenty-five trillion in corporate debt, means Chinese consumers are stocking up on gold as protection against potentially worthless cash.

Also bolstering gold prices going forward is China’s new gold exchange. To participate, parties have to actually deposit physical gold bullion. The move puts to an end the practice of players with no skin in the gold game being the ones who set the international market price for the commodity. Gold investors worldwide can look forward to the Chinese exchange putting upward pressure on prices.

Relax About the Fed

The Federal Reserve has been talking about raising interest rates for five years, so the market is prepared. Even when the Fed started moving rates up they immediately got cold feet once they saw the impact on markets and the effect on the dollar. An over-strong currency is not necessarily a good thing for U.S. businesses with overseas markets (as Apple can surely tell you) and the Fed will weigh the relative strength of the dollar in its rate hike decisions.

For those who weathered the down days in the gold market, this is your payback time. It’s also the time to start really moving on protecting your retirement by putting some tangible assets in a gold IRA.  Don’t worry that the Fed is going to spoil the party.