Gold To Benefit As Hawkish Fed Puts Global Economy At Risk - Degussa
(Kitco News) - The Federal Reserve’s current monetary policy will be in focus this week as central bankers from around the globe converge in Jackson Hole Wyoming for their annual retreat and this could be good news for gold investors, according to one global precious metals dealer.
While gold has been at the mercy of surging U.S. dollar, analysts at Degussa expect this trend to soon reverse due to the Federal Reserve.
In a report published last week, the analysts said that hawkish Fed monetary policy, which is strengthening the U.S. dollar can’t last because it is putting the global economy at risk.
“In the period of extreme low US interest rates, many foreign borrowers â€“ in particular, those from emerging market economies â€“ have taken on US dollar denominated debt. An appreciating US dollar causes them quite some trouble: It increases the costs of serving their debt,” the analysts wrote.
“Deterioration in credit availability and the cost of funding undoubtedly has the potential of unhinging the credit-driven boom in many emerging market economies,” the report added. “This, in turn, is most likely to also have negative consequences for the developed economies around the world, including the United States of America.”
The analysts said that the U.S. central bank can’t ignore the growing threat of international credit markets and emerging markets. They added that a “day of reckoning” is come soon if the Federal Reserve continues to raise interest rates.
“If the Fed's monetary policy tightening tanks the boom of other economies around the world, the U.S. economy is unlikely to escape the mess â€“ and the Fed will have to reverse course,” they said.
In this environment, gold, as a global currency, looks attractive, said Degussa analysts. Gold prices kicked off the week on a strong note, up 1% on the day. The rally comes after the market dropped to a 1.5-year low last week. December gold futures last traded at $1,197.20 an ounce.
“Gold has become cheap (and undeservingly so) â€“ which might be painful for those currently holding gold but offers an excellent opportunity for those who want to build up their gold positions,” the analysts said. “It appears that we are right in the middle of a situation in which market prices do not reflect ‘true values': The stock market seems to be expensive, and gold is too cheap. And history taught us that over- and undervaluations will be corrected over time.”