The Fed’s Influence on Gold Prices
The price of gold recently hit a record high, but the economic factors that typically drive investors to rush to the safe haven metal are not present. So what happened?
The reason may instead have to do with the Federal Reserve. Many investors believe the central bank is at the end of its interest rate hiking cycle that began to get a handle on the rampant inflation of the last years. As inflation has cooled off and other economic indicators also point to cooling conditions, the Fed has already kept its benchmark interest rate unchanged at its most recent meetings. Here’s why that matters for gold.
How It All Connects
If the Fed is done raising rates, the next move, it stands to reason, is to cut them. Bond yields, which serve as the market’s expression of interest rate expectations, have indeed been falling in anticipation of a rate cut at some point next year. And a decline in bond yields can drive investors to gold, which becomes comparably more attractive as yields fall.
Gold futures settled at an all-time high of $2,071 per ounce on Friday. The price is up 11% this year, advancing seven of the past eight weeks. Futures are now on pace for their best annual performance since 2020, when the financial tumult of the pandemic sent investors fleeing to safety.
Wall Street’s Watchful Eye
But it’s also a strange time for the price of gold to rise. Investors tend to buy gold to shield themselves from inflation, or to hide their assets during times of economic downturn. But inflation is cooling, and the economy has remained strong so far. That said, geopolitical conflict might send investors searching for safety. Either way, Wall Street is keeping a close eye on what’s going on with the precious metal.
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