Gold Price Update, What Next: Could the Fed Go Negative?
Gold prices are taking a breather today.
The price of gold fell back below US$1,700 overnight after the US Federal Reserve kept rates on hold at a record low of 0–0.25%. Also, due to the fact that there were some good results coming out from an experimental drug in the fight against COVID-19, which brought back some optimism.
Gold prices may have fallen, but they are still the highest we’ve seen in a while, as you can see in the chart below.
In fact, year-to-date, gold priced in US dollars is up by 11% at time of writing.
That number is almost double when you look at gold in Australian dollar terms. Year-to-date, gold has gained over 20% when measured in Australian dollars. This is because Australian gold investors have benefitted from both the increases in gold prices AND a falling exchange rate against the US dollar.
Why does the gold price keep increasing?
Well, for one, there is all the fear caused by COVID-19. The pandemic has forced countries to close their borders, business to shut their doors, and people have lost their jobs. The repercussions of this could be felt for years.
When things turn negative, people jump into gold.
Then there is the fact that the Fed has been lowering the funds rate.
One of the biggest criticisms for gold is that it has no yield. Low interest rates are bad for savers, and for people going into retirement. But it’s good for gold.
Could the Fed go negative?
Since COVID-19 hit, the Fed has been cutting interest rates aggressively. They have also restarted their bond purchasing program to increase liquidity.
During their conference this week, the Fed has promised to using their ‘full range of tools to support the economy in this challenging time.’ Those tools could very well take the Fed down the path of lowering interest rates from close to zero to negative.
At negative rates, the case for gold gets even better as having cash in your bank account does not only give you no yield, but it loses you money.
These are some good reasons why investors should own gold today.
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