Last week, the Federal Reserve released the minutes of its meeting held in March. The minutes revealed that the U.S. Central Bank would be increasing interest rates by 25 basis points. The breaking of this news didn’t cause ripples in the gold markets for a number of reasons.
First, markets had been expecting the interest rate to be increased by 50 basis points, and the actual increase fell short of that anticipation. This explains why the price of gold hardly lost any ground in the wake of the rate hike announcement. Under normal circumstances, an increase in interest rates reduces the attraction of investing in gold bullion, but other factors have played a hand in keeping gold stable despite this modest increase in interest rates.
One of those intervening factors is the war going on in Ukraine. Events there have investors jittery, and gold is perfect for preserving value in times of uncertainty, such as during war. Additionally, inflation seems to be rising unabated, and with rising inflation, gold is an attractive investment since it can serve as a hedge against the losses that may be triggered when inflation eats into the gains made by investors in other asset classes, such as stocks and bonds.
Craig Erlam, a market analyst for OANDA, says many things can trigger another bull run for gold. These include the possibility that talks between Russia and Ukraine collapse, or when inflation accelerates at a faster pace than what the market has been expecting. Some analysts, such as Bob Haberkorn of RJO Futures, think that inflation is most likely to accelerate over the coming six months because the Federal Reserve doesn’t seem capable of increasing interest rates quickly enough to stem the tide of inflation.
As things stand, it looks like gold is still in a strong position to remain stable or even rise higher, with sector players such as Newmont Corporation (NYSE: NEM) (TSX: NGT) producing great returns to their stakeholders. The gains observed in the market for gold are also manifesting for other precious metals. For example, silver gained 0.4% to hit $24.4 an ounce.
It is important to note that the minutes of the Federal Reserve meeting in March indicate that interest rates could be hiked again in May at the next Fed meeting if inflationary pressures intensify or remain elevated during the time between the meeting in March and the next one due in May. If the Fed increases the rate by half a percentage point and the other factors buoying up the price of gold remain unchanged, we could see some investors exit in search of avenues with better yields that bullion.
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