Should You Invest in Gold After Fed Rate Hike?

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The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products have traded lower over the past month and, in recent days, have mostly listless as traders waited on the conclusion of Wednesday's Federal Reserve meeting. However, some market observers believe ongoing weakness in the U.S. dollar will reignite gold prices.

Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs this year.

The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) is down about 1.75% year-to-date. That after the fund fell more than 9% last year. UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. UUP tracks the Deutsche Bank Long USD Currency Portfolio Index – Excess Return Index.

“Once Wall Street gets more clarity from this week's Federal Reserve meeting and rhetoric surrounding the risks of trade wars subside, Vertical Research Partner Michael Dudas expects gold to spring out of its trading range,” reports CNBC.

Why Inflation Could Help Gold, Gold ETFs

Inflation could serve as a catalyst for the yellow metal and for gold-related ETFs. By some metrics, the Fed has under-estimated U.S. inflation, which could prove beneficial to gold because the yellow metal is historically a popular inflation fighter.

“Gold typically has an inverse relationship to the value of the U.S. dollar. So, if the greenback continues to weaken this year as he expects, it could help support higher gold prices. Dudas also sees upside inflation risks pointing to a bullish backdrop,” according to CNBC.

Looking ahead, market and economic factors could contribute to safe haven demand for gold. For instance, rate hikes, central bank monetary policies and geopolitical risks can add to uncertainty.

Gold may be past its peak supply as exploration budgets have collapsed. Gold miners are also finding fewer large deposits, which have further weighed on the supply outlook.

“The yellow metal, considered a safe-haven asset, is trading around $1,310 and has been flat this year. Even when the Feb. 2 correction gripped the stock market, it failed to rally in the weeks that followed,” reports CNBC.

For more information on the gold market, visit our gold category.

Tom Lydon's clients own shares of GLD.

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