Degussa To Gold Investors: Don't Worry, Interest Rates Are Still Going Down
(Kitco News) - The gold market has hit a bit of a stumbling block as prices have dropped due to shifting U.S. monetary policy expectations. But one precious metals firm think that gold prices have room to move higher.
Analysts at European precious metals retailer, Degussa, said that they see gold prices pushing higher through the rest of the year as global interest rates ultimately head lower.
Gold prices are struggling around $1,400 an ounce as investors re-evaluate Federal Reserve interest rate cuts by the end of the month. August gold futures last traded at $1,400.90 an ounce, down 0.24% on the day.
Although forecasts for two rate cuts has dropped significantly, markets still expect the U.S. central bank to cut rates by the end of the month. The CME FedWatch Tool shows that markets are still pricing in nearly four rate cuts by the end of the year.
Degussa analysts said that they see U.S. interest rates falling to 1.25 per cent by the first half of next year. Meanwhile, European interest rates could fall further into negative territory to -0.7% from -0.4%. With inflation expected to rise this means that real interest rates could fall in negative territory, the analysts add.
“In an environment of zero or negative real interest rates, the opportunity costs for holding gold collapse, and the bet on gold becomes even more rewarding as the holder of gold does not forego interest income,” the analysts said. “It should be clear that things will most likely become pretty messy once the next crisis hits – and it surely will hit, as sound economic analysis suggests.”
Not only does gold look good in a low interest rate environment, Degussa said that it is also solid protection in a financial crisis.
“There is undoubtedly an obvious case for holding gold as part of the liquid means of the investor’s portfolio. Monetary policy actions cannot debase the purchasing power of gold,” the analysts said. “Furthermore, gold protects against payment defaults, thus also shields the portfolio against the consequences of a full-blown credit crisis.”