The price of gold reacts to the Fed’s urgent interventions

The price of gold reacts to the Fed’s urgent interventions

The drop in interest rates was carried out by the US Federal Reserve on March 3. This was due to the economic emergency caused by the coronavirus epidemic. Gold rose 3% immediately after the decision became clear. Experts try to agree on how the price of gold will react, in the medium and long term.

Ryan Giannotto, director of research at GraniteShares, said that the last time the Federal Reserve announced a cut of 50 basis points in interest rates by surprise, was in 2008.

After that announcement, the price of gold undertook an extraordinary bull run. Which led it to revalue more than 17% in that year. On the seven occasions in which emergency cuts have been made, gold has risen 26% on average over the next two years, said the analyst.

In his opinion, it would be foolish to discard a movement that leads to the price of gold at      $2,000 an ounce later this year.

According to Giannotto, a perfect storm is being created in the financial markets. The Fed undertook a new cycle of relaxing its monetary policy last year. The bond yield curve was reversed and markets are digesting a cut in emergency types. Any of these factors would set a bullish scenario for gold, but the three are coinciding at the same time, states the analyst.

 

Market movements are similar to the financial crisis of 2008

Juan Carlos Artigas, director of Investment Research of the World Council of the Gold, recalled that there are precedents for this unscheduled interest rates cut by the Federal Reserve. The Fed cut rates by 50 basis points in January 2008. Between two of its meetings, issues regarding the US real estate market began to arise. At that time, the rates were above 4%, which gave the Fed much ammunition to undertake future cuts.
Market movements are similar to the financial crisis of 2008

In contrast, the current low level of interest rates in the United States gives the Fed a much smaller room for maneuver.  Thus, it may have to resort to other alternative policies.

The stock exchanges reacted positively to the recent surprise cut of the Fed at the beginning. However, so far this year, most of the US stock indexes have fallen 3% or more. On the other hand, the price of gold has skyrocketed in 2020, reaching an intraday high of $ 1,650 an ounce [March 3] and increasing almost 7.5% in what we have this year, says Artigas.

The head of the World Gold Council thinks that rate cuts should boost the increase in demand for gold investment. Even if consumer demand slows down.

From the British consultant Metals Focus, in its latest report of Precious Metals Weekly. They point out that, after the announcement of the Fed, the price of gold rose 3%, before going back again to $ 1,640 an ounce.

These market movements are reminiscent of those of the financial crisis of 2008. At that time, the price of gold skyrocketed immediately after the fall of Lehman Brothers. Those gains, however, dissipated very soon, after a stock market crash forced investors to liquidate the metal to cover their losses.

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