All eyes will be on the upcoming U.S. Federal Reserve meeting this week, as many investors watch for clues on when the Central Bank may start tapering its pandemic stimulus. How might this affect the price outlook of precious metals? Read on to find out more.
Dollar Strong as Gold Price Slides
The gold price sank by around $50 on Thursday of last week, hitting more than a five-week low. This slide in precious metals ensued after a surprise gain in retails sales for August was reported, showing signs of a strengthening US economy, boosting the Dollar and rekindling fears that the Federal Reserve may be about to begin tapering its pandemic-era stimulus.
After Thursday’s slide in price, gold has attempted a bounce back, yet has still appeared to struggle slightly due to a stronger US Dollar. Speaking of the Dollar, this also saw some benefit from safe-haven demand due to the escalating liquidity crisis at Chinese property developer giant Evergrande, which has stoked fears of damage to other property developers and financial institutions. Whilst lifting the greenback, this crisis has not benefitted gold - mostly due to the possibly looming Fed tapering decision.
All Eyes on the Fed
Investors will be keeping a close eye on the results of the Fed’s policy-setting meeting on Wednesday this week, as many believe that it could turn its back on its quantitative easing stimulus program and begin tapering it off later this year. The central bank is also likely to release new economic projections and its expectations on changes in interest rates.
Other central banks, including those in the UK, Japan, Switzerland, Sweden, Norway, Indonesia, the Philippines, Taiwan, Brazil, South Africa, and Turkey, will also hand down their policy decisions this week.
So, how might this affect gold?
Precious metals are seen as a hedge against inflation and the currency debasement likely from stimulus programmes. An announced unwinding of these economic support measures could possibly prompt a knee-jerk reaction in gold, temporarily dimming its appeal to investors.
However, it’s also worth remembering that gold is not a fan of prospective interest rates, and if inflation rises more rapidly than interest rates, gold’s diminished shine could polish back up again. Inflation has a powerful influence over gold and, as we saw last week, the UK saw the largest rise in inflation on record in August this year.
As for now, all eyes are on the Fed. As always, we can never 100% foretell what may happen with precious metals, but we do know that for many, nothing says financial security like the possession of physical gold and silver.
Could now be the perfect buying opportunity?
This blog represents one person’s opinion only. Customers should conduct their own research and take advice before making an investment. We do not offer investment advice.