The Federal Reserve is the central bank of the United States. It changes its target interest rates in order to keep the country’s economy at a healthy rate of growth. As Kavan Choksi UAE mentions, the Federal Reserve or Fed raises rates when the economy is too hot and inflation rates threaten to increase. Conversely, it lowers the rate when the economy is sluggish to boost activity to a healthy level. By raising or lowering the federal funds rate the Fed manipulates overall interest rates. The federal funds rate basically is the rate at which banks borrow and lend money to one another for a short term in order to maintain a reasonable balance of cash in their vaults.
Kavan Choksi UAE provides insight into how the Fed’s rate decisions are important for commodity investors
The Federal Reserve’s rate decisions are quite an important factor in the global financial markets. It has an impact on everything, starting from bonds and stocks to commodities like silver and gold. The Fed typically adjusts rates to curb inflation by making borrowing more costly, which lowers spending and slows down the economy. On the other hand, the Fed may also lower rates to make borrowing cheaper in order to stimulate the economy. After all, a lower cost of borrowing encourages investment and spending.
Gold and silver are considered to be safe-haven assets. Investors flock to these assets during times of economic uncertainty. Such precious metals do not yield dividends or interests, and hence they are more appealing when rates are low. When the Fed raises rates, the opportunity cost of holding diverse types of non-yielding assets like gold and silver increases. This may lead to a decline in their prices. However, as the Fed lowers rates, the attractiveness of gold and silver improves, and often drives up their prices. Lower interest rates additionally may lead to higher inflation, and therefore make gold and silver more attractive as inflation hedges.
Higher interest rates in the United States ideally strengthen the value of the dollar. A stronger dollar would make silver and gold more costly for foreign investors, and hence the demand and prices of these commodities may go down. Just the opposite happens when the interest rates are reduced. Lower interest rates weaken the dollar, which makes silver and gold more budget friendly for foreign investors. This increases the demand for gold and silver, and ultimately pushes their prices higher.
As Kavan Choksi UAE says, investors need to keep track of the Fed’s policy announcements and understand the rationale behind the rate changes. It is prudent to not put all the investments in commodities. All investors should prioritize diversifying their portfolio in order to manage the risks associated with fluctuations in interest rates. Seasoned investors may even try to make use of financial instruments like futures and options to hedge against potential adverse movements in gold and silver prices owing to Fed rate changes. They may consider carrying out a technical analysis in order to identify entry and exit points in the commodities market, particularly near the timings of Fed meetings and announcements. Overall, the Federal Reserve’s rate decisions do have far-reaching implications for the commodities market, especially gold and silver.
