Why the Federal Reserve Can Drive Gold Prices Higher

The price of gold has shot up this year as concerns about a macroeconomic slowdown, trade wars, and other geopolitical tensions have forced investors to put money in a safe haven asset.

The good news for gold investors is that the yellow metal’s rally is not going to end anytime soon. That’s because the Federal Reserve is expected to go for a quarter-point rate cut this month, and that could send the price of gold soaring.

The Fed Could Be a Catalyst for the Gold Price

Fed chairman Jerome Powell’s latest comments indicate that a rate cut might be in the offing. He said in a testimony before the House Financial Services Committee that:

Since [June]…it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.

More importantly, Powell isn’t only looking at a potential rate cut at the next Fed meeting. According to James Bullard, who is the president of the St. Louis Fed:

Sitting here today I would argue for a 25 basis point cut at the next meeting. I put 50 basis points worth of reductions by the end of the year. So that would mean this cut plus another one at some point later in the year.

This makes it clear that the Federal Reserve can be expected to cut rates sooner rather than later, and this will be a tailwind for gold prices. I’m saying this because the U.S.-China trade war isn’t showing any signs of easing, and this might impact the U.S. economy.

If U.S. companies take a hit from the trade war, it will reflect on their earnings performance this season. As a result, there is a probability that the earnings performance might be weaker than expected, and send stocks lower. This is why the Fed could consider slashing interest rates because it will boost the economy by lowering lending rates, allowing companies to borrow more to power their growth.

This will be great news for gold.

Gold Prices Are Set to Soar Higher

If the Fed actually lowers the interest rate, be prepared for higher gold prices as investors will decide to park more funds in the yellow metal. This is because the yield on treasuries and bonds will fall because of a rate cut, and that will make gold an attractive bet as it does not pay any interest.

Moreover, a rate cut will reaffirm the fact that the Fed sees an economic slowdown coming, which will further increase interest in gold. The U.S. economy is expected to grow at a rate of just 1.8% in the second quarter after recording a 3.1% increase in the first one. As such, now would be a good time to invest in gold and gold equities because there’s only one way the commodity seems to be headed – north.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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