On Wednesday, September 18, the US Federal Reserve announced that the interest rate would be lowered by 0.25% to the rate of 1.75%. However, Federal Reserve members were divided as for what would happen next. Out of the 17 execs polled (12 heads of regional banks and 5 members of the board), 7 expected the rate to be in a range between 1.5% and 1.75% by the end of 2019; 5 members believed that the rate will remain at its current level; while 5 expected it to be raised to 2% or even 2.25%. In any case, the head of the board, Jerome Powell, pointed out that the Fed will probably start increasing its reserves earlier than expected (perhaps unsurprisingly).
Lowering the interest rate might seem illogical: indeed, this is usually done during a recession, when stock exchange prices are down and it's necessary to stimulate the economy by making borrowing cheaper. However, we aren't seeing any recession (yet), financial markets are booming, and the economy is growing by 3% yearly. So, why stimulate something that is growing anyway? This is especially relevant since reducing the interest rate during a period of growth can actually cause harm by inducing inflation.
It is very likely that the Federal Reserve is trying to think ahead, considering the ongoing trade war and the high cost of the US national debt. By reducing the rate, it gives a signal to speculators and investors to buy any assets pegged to gold. The more relaxed the credit policy, the more attractive are the assets that can hedge investors against inflation.
For how much longer will the gold price keep growing?
The global price of gold is likely to keep growing without major corrections at least until the US presidential election in November 2020 — and can reach $1,900 per ounce.
At the same time, the market is currently overheated, so a respite is likely. September marks the end of the financial quarter (and of the financial year in the US), the start of a new season, and a traditional time for market trend reversals. One can also expect a truce in the US-China trade war, alongside a reduction in the international political tensions.
If we assume that gold acts as an indicator of mistrust in the state and financial system, than its price is bound to grow as the global level of political instability and uncertainty increases. The upcoming US presidential elections are the main driver of this uncertainty. Therefore, the price of gold is likely to keep growing at least until the outcome of the elections is revealed in November 2020.
The elections are expected to be marked by intense struggle and polarizing opinions, creating chaos in the relations between the US and the rest of the world. Much will depend on the results: first and foremost, the future direction and priorities of the US foreign policy, as well as the dynamics in the relations with China and Europe. On the one hand, Donald Trump is extremely unpopular among some of the electorate, especially for leftist progressives, defenders of minority’s rights and environmentalists.
Moreover, Trump irritates many among the «deep state» and intelligence communities, as well as New York financial circle members, executives of leading tech corporations, and a large proportion of the media - this is why Trump is forced to use Twitter to communicate directly with his voters, thus bypassing the media. As such, a wide and varied anti-Trump coalition has formed.
On the other hand, Trump doesn't have any strong opponents among the Democrats. The Democratic Party is undergoing an acute crisis of values and ideas: it is dominated by eccentric supporters of radical leftist ideas, which scare away more cautious voters.
The stakes are very high. As political tensions increase, the price of gold will grow and the USD exchange rate is likely to decline. However, the issues in Europe are even more serious, so there's no reason to believe that the dollar will fall relative to the euro or, even less likely, the pound. Political chaos and instability reign almost everywhere, thus driving up inflationary expectations and precious metal prices.
Indeed, inflation is also a psychological phenomenon, reflecting people's feeling of security in their future. The stronger the instability, the less secure people feel. Manufacturers and sellers hedge their risks by increasing the prices of their goods and services. In times like these, gold becomes an optimal means of protecting one's money. The most sensible way of investing in gold is buying it in its most liquid form — that is, in coins.
Apart from a growing demand for gold, in the next few years, we are likely to see a new silver fever, as well, possibly leading to a several fold increase in its price. Since silver is less liquid and more cumbersome to store, new and more convenient ways of investing in silver will probably emerge on the market.
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