Tags: federal | reserve | gold | prices | interest

How Does the Fed Affect Gold Prices?

By    |   Tuesday, 24 April 2018 11:34 AM

It’s widely believed that certain actions taken by the Federal Reserve will have an immediate effect on the price of gold. Some investors think interest rate hikes, for example, will push prices lower. However, that is not always the case.

The link may even be insignificant. There was only a 28-percent correlation between interest rates and the price of gold from 1970 to 2015, according to Investopedia.

Throughout the 1970s when gold prices soared, short-term interest rates jumped from 3.5 percent in 1971 to 16 percent by 1980. Gold prices skyrocketed from $50 an ounce to $850 during the same time. Both gold prices and interest rates declined for the next two decades.

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After 2000, gold prices did begin to take off as interest rates fell to nearly zero. However, the price of gold advanced nearly 50 percent between 2004 and 2006 when the Fed hiked rates from 1 to 5 percent. The price of gold may depend more on supply and demand with demand being the major factor, Investopedia maintains. Volatility and buying gold as an alternative to investing in the stock market also play a role.

Three interest rate hikes by the Fed in 2017 saw gold prices rising 13 percent, according to George Milling-Stanley, who heads investments at State Street Global Advisors, TheStreet reported. The Fed raised interest rates by 25 basis points, from 1.50 percent and 1.75 percent, in March 2018. Milling-Stanley said, “Gold could do even better than last year.”

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Inflation is often a factor in increasing the price of gold, as happened during the 1970s. The Fed’s actions could have an indirect impact on gold prices as it tries to maintain economic stability. Vigorous economic growth after interest rates drop could spur inflation.

The Fed can expand its balance sheet of assets and liabilities by printing more money. Following the financial meltdown of 2008, both the Fed’s assets and the price of gold rose until 2011, according to Sunshine Profits. Gold prices began falling after that while the Fed’s balance sheet continued to rise.

There may not be a “clear relationship between the Fed’s balance sheet and the price of gold,” Sunshine Profits concludes. Rather, gold prices might be affected by how investors perceive the actions of the Fed.

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It’s widely believed that certain actions taken by the Federal Reserve will have an immediate effect on the price of gold. Some investors think interest rate hikes, for example, will push prices lower. However, that is not always the case.
federal, reserve, gold, prices, interest
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2018-34-24
Tuesday, 24 April 2018 11:34 AM
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