Trying to figure out why the gold price rises and falls can sometimes feel like an exercise in futility. What it all comes down to ultimately is the interplay between supply and demand. And with supply largely being steady and stable, that means demand plays a large role.
Right now the demand for gold is through the roof, yet the price hasn’t shot up accordingly. That’s kind of perplexing to many people, but there’s a good reason for that.
Why Isn’t Gold Moving Higher?
Over the past few weeks gold has traded in a relatively stable price range, sticking roughly to an $1,800 to $1,850 per ounce average. There really hasn’t been a lot of movement away from this narrow band, which has some gold buyers understandably frustrated.
We have high and rising inflation, surging gold demand, shortages of physical gold coins available for purchase, and an economy that seems to be on the verge of recession. So why isn’t gold moving higher?
One of the major explanations for it is that the Federal Reserve is hiking interest rates, and higher interest rates are seen as negatively impacting the gold price. Now that doesn’t have to be the case. But in this case we’ve seen institutional investors such as hedge funds offloading their gold holdings because they believe in this conventional wisdom.
They believe that the higher the Fed hikes interest rates, the worse that will be for gold, and so they’re moving to offload or short gold for the time being. But while that has had a somewhat depressive short-term effect on the gold price, it can’t completely overwhelm the surge in demand from retail investors.
Can Gold Price Continue to Rise?
Despite the conventional wisdom that rate hikes are bad for gold, that isn’t always the case. Just look at the last time the Fed hiked rates in a conventional rate hiking cycle, from 2004 to 2006.
In January 2004 the gold price was around $400 an ounce and the federal funds rate was 1%. By July 2006 the Fed had raised the federal funds rate to 5.25%. And gold? It was over $600 an ounce, having gained more than 50% over the past two-and-a-half years.
Clearly, then, rate hikes aren’t always bad for gold.
And what happened during the latest, smaller Fed rate hike? In November 2015 the federal funds rate was at 0.00-0.25%, while gold was around $1,140 an ounce.
The Fed made its last rate hike in December 2018, pushing the federal funds rate to 2.25-2.50%. And gold closed the year around $1,300 an ounce. Once again, the rate hikes clearly didn’t result in a lower gold price.
So why does the conventional wisdom continue to say that rate hikes will depress the gold price? It’s hard to say.
Perhaps this is one of those sayings that took root decades ago and continues to be passed down like an old wives’ tale even though recent empirical data disproves it. Whatever the reason, hedge funds seem to be eschewing gold right now. But that’s good news for retail investors who can benefit from the relatively stable price of gold right now to stock up before gold takes off again.
What Happens If the Fed Blinks?
One factor that has helped contribute to rising gold prices in the past is quantitative easing. The vast amounts of money that have been pushed into the financial system since 2008 have certainly contributed to rising gold prices, as they have to rising prices throughout the economy. But with the Fed now beginning to tighten its balance sheet once again, there are fears that that may negatively impact the price of gold.
What happened the last time the Fed tried to reduce the size of its balance sheet?
In mid-July 2017 the Fed’s balance sheet peaked at just under $4.5 trillion. Gold was around $1,240 at the time.
The Fed began to withdraw liquidity from the system, so that its balance sheet dropped to a low of around $3.76 trillion by the end of August 2019. And gold? It had climbed to over $1,500 an ounce.
So here we’ve seen that even during times of rising interest rates and a declining Federal Reserve balance sheet, gold continued to climb in price. It stands to reason, therefore, that what the Fed is doing today won’t necessarily negatively impact the gold price.
The real question that needs to be asked is, what happens if the Fed abandons its interest rate hikes and balance sheet reduction?
There’s a very real possibility that the US economy is already in recession, and that that recession will be announced this year. If that happens, the Fed may come under pressure to stop its quantitative tightening and open the monetary spigots once again. And that could be beneficial to the gold price, just like the massive QE in the aftermath of the 2008 financial crisis helped push gold to new highs.
In short, the case for gold is quite bullish. All the factors seem to be coming together to provide a scenario in which gold is set to take off
Don’t Wait to Buy Gold
The key to protecting yourself with gold, however, is to get your hands on some. And right now that’s becoming a lot more difficult for many people. Demand for gold has become so strong that coin supplies have been drained, and mints are working overtime to try to meet consumer demand.
If you’re looking at starting a gold IRA to help protect your retirement savings, or just thinking about buying some gold coins to store at home to protect yourself in the event of a financial crisis, you may not want to wait too long.
Millions of people watched their retirement accounts hemorrhage massive amounts of money during the 2008 crisis. And they watched as gold gained value and left them in the dust.
Many thousands of people have already protected themselves this time around by buying gold. Are you one of them?
If not, and if you’re thinking about buying gold to protect yourself, call the experts at Goldco today to learn more about how gold can help you safeguard your savings.