If you are looking for further proof that economic policy decisions have a bearing on fluctuations in asset prices, here it is. Very recently, the U.S. Federal Reserve decided to hold off on raising interest rates for borrowing the U.S. dollar. This has a direct impact on the ability of U.S. based companies to borrow money, and it signals that the dollar isn’t quite as strong yet as it could be. While the Fed did cite that the dollar was growing closer to where they wanted it to be, and that the economy is headed in the right direction, overall, things are not quite as strong as they would like them to be at this point in the year.
The moment that this decision came out, the price of gold began to stabilize. Even before the U.S. markets opened up on Thursday, July 28th, the price of gold has already begun to steadily rise. By the time that the opening bell sounded on Wall Street, gold was up by more than $7 per ounce. Much of this rise was not because of the fact that rates for borrowing didn’t go up—that was largely expected by most investors and had already been taken into account in most positions—but because the Fed did not say that they were going to raise rates later in the calendar year. For much of the last few Fed meetings, this is something that had been on the table as a possibility. But with this last report, it was not mentioned. This seeming change in future policy had a profound impact on the price of the precious metal, and gave traders and investors alike a new bout of enthusiasm when it came to buying.
Gold has pretty much held steady since hitting a two-year high back in June after the surprise voting that resulted in Britain electing to leave the European Union. There has been a slight decrease since then, but not anything to be concerned about. Still, as the asset sat in a seeming holding pattern, there was very little incentive for investors to grab up more of the commodity. As interest waned, prices relaxed, and this often leads to sharp declines down the road. The Fed’s announcement awakened the metal out of its lethargy and created a new round of interest in it. The flurry of buying is not likely to last more than a couple days, of course, but new recent highs are likely to develop from this activity.
Gold is often used as a hedge against the U.S. dollar. When the dollar moves one way, it is not uncommon for the price per ounce of gold to move the other. While it’s not a direct negative correlation, it is a fairly strong one, and it’s one that investors and large firms have used for many years to help stabilize their value. Even though this is a long term hedging strategy, it’s one that short term traders, primarily those that use binary options, can use to help grow their money even more quickly.
Do beware, though. The Fed is not likely to hold off on raising interest rates for very long. The lack of a mention of it occurring in 2016 does not mean that it won’t happen in 2016. Yes, the Fed has held off on raising rates for a few months longer than they originally indicated that they wanted to, and if the economy keeps improving, there will be little reason to continue waiting. How gold will react to this remains to be seen, and this flurry of action is likely more of a positioning battle for the future than anything. Gold will be likely to go up more when the dollar drops in the future, so as you prepare your trading strategy, keep this in mind.