Gold Still A Good Insurance Policy As Rates Rise - Degussa
(Kitco News) - Gold has fallen to a three-week low as the Federal Reserve starts a two-day monetary policy meeting; however, one bullion firm said that it sees some buoyancy in the precious metals, despite the threat of higher interest rates.
Although gold prices are testing support just above $1,300 an ounce, analysts at Degussa said that the current price could represent an attractive entry point for investors looking for some market insurance. Comex April gold futures last traded at $1,308.60 an ounce, down 0.70% on the day.
“At the current price, there is a good reason to expect that gold can serve as insurance against the vagaries of the fiat money system, providing its owner with optionality,” the analysts said in a recent report.
The international bullion firm noted that there are other factors in play within the marketplace that are helping the yellow battle the threat of higher interest rates. In particular, the analysts explained that there are growing concerns that the U.S. economy could slip into a recession because of rising interest rates.
“The Fed's tightening policy is like taking away the ‘punch bowl,’ and if it raises interest rates too much, the party would definitely come to an end. It is against this backdrop that gold, even in times of slightly higher real interest rates, is increasingly attracting investors, which has ultimately led to a price increase,” the analysts said.
The firm also said that gold is seeing strong support as a global currency. The analysts noted that while gold against the U.S. dollar is traded at the lower end of a near-term channel, the yellow metal is outperforming a basket of global currencies. Degussa said that global inflation pressures make the precious metal an attractive safe-haven asset.
“The price of gold should, over the long run, compensate its owner for the loss in the purchasing power of fiat currencies,” the analysts said.
Degussa’s comments come ahead of the Federal Reserve’s widely expected interest-rate hike Wednesday. While the market sees the move as all but guaranteed, there is considerable uncertainty over the future trajectory of rate hikes later in the year. Markets are starting to price in a chance that the Federal Reserve will signal four rate hikes in 2018, up from its December forecast for three rate hikes.
There are also expectations that the U.S. central bank will shift is expectations for stronger economic growth, higher inflation and a lower unemployment rate.