Forget everything. If you want to know just one big reason to be bullish on gold prices, then look to the Federal Reserve.
Let me explain…
If you follow the gold market closely, you know this very well: gold prices were going higher because the Federal Reserve kept its interest rates significantly low and kept printing more and more money.
Starting in 2013, gold bullion became one of the most hated assets. The reason behind this was that the Federal Reserve would be raising its benchmark interest rates and higher interest rates are bad for gold prices. So, it was understandable to some extent.
In December of 2015, the Federal Reserve did raise interest rates. With this, everyone was convinced the Fed would continue to raise rates. Wrong.
On March 16, the Federal Reserve provided its projections for where the U.S. economy is headed, and what its members think about where interest rates are going.
First thing first, the Federal Reserve, in its most recent meeting, didn’t raise interest rates. Something even more interesting: initially, we were told that there would be four rate increases in 2016, but now we are told only two hikes are expected.
Also, you have to remember the basic principle by which central banks around the world operate; the Federal Reserve is no difference. They tend to lower rates when the economy isn’t doing well.
With this said, the Federal Reserve lowered its U.S. economic forecast. It expects the U.S. economy to grow by 2.2% in 2016, 2.1% in 2017, and just two percent in 2018. (Source: Federal Reserve, March 16, 2016.) Dear reader, you have to remember that over the past few years, the Fed’s guidance keeps getting revised lower and lower. I will not be surprised if these figures are revised lower again in June, then in September and December.
But know that this will throw all hopes of higher interest rates down the drain. We already see the Fed’s members pulling back on their interest rate estimates as well.
The Federal Reserve changing its tone over interest rates is bullish for gold prices.
Here’s what I am really waiting for (and it may sound alarmist): I not only question lower interest rates for an extended period of time, but I also question if some sort of quantitative easing could be coming soon, too. If so, this could spark a big rally in gold bullion.
Since the beginning of the year, gold prices have seen a solid move to the upside. They continue to trade above their long-term and short-term downtrends. This is encouraging, to say the least.
All I can say right now for certain is that gold bullion has surprised investors and just a few months into the year, it has exceeded expectations. Going forward, the precious metal could continue to do so. Investors oversold the precious metal for all the wrong reasons and they are starting to realize this now.
With all this in mind, I continue to focus on gold mining companies. They provide leveraged returns. If gold prices go higher, mining stocks will see an exponential rise. They are certainly worth a look.
Courtesy: Moe Zulfiqar
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