The record highs “were driven by the initial flight to safety, followed by the reaction to the massive monetary and fiscal policies” put into play to strengthen the economy in the wake of the pandemic, says William Cai, co-founder and managing partner at Wilshire Phoenix. Due to the pandemic, the U.S. Federal Reserve has kept its benchmark interest rate close to zero, benefiting gold.
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Prices for the metal, however, have eased back by 14% (which is far less than stocks and cryptos) from the record and gold looks to rebound sharply after the Fed stops clowning around with interest rates.
The pullback in gold is a “healthy consolidation,” with the market digesting the effects of those monetary policies and potential follow-on policy adjustments, Cai says. Inflation, meanwhile, looks to be the major factor that will continue to support gold prices in the medium term, he says.
The Fed has helped to ease some of the uncertainty driving demand for gold as a haven. The central bank’s loose monetary policy contributed to the creation of an “economic bubble” to offset Covid-19’s harmful economic impact, says Drew Rathgeber, senior futures broker and branch manager at AIO Capital.
On March 8, gold futures dropped to $1,678, their lowest since April 2020, amid strength in the U.S. dollar and a rise in Treasury bond yields, which can dull demand for gold. However, patient gold investors can rejoice, “A perfect storm is setting up for gold to go much higher.” Inflation is “here to stay for a while,” in part due to the Fed’s loose monetary policy and its failure to highlight “cost-push inflation,” he says. A rise in the cost of production and raw materials leads to cost-push inflation, and inflation can decrease the value of the dollar over time, raising gold’s investment appeal.
