Every so often financial markets have a knee-jerk reaction that presents investors, particularly long-term investors, with opportunity. Such may be the case with reaction to Federal Reserve Chairman Jerome Powell’s June 16 announcement that the central bank is likely to begin raising short-term interest rates in 2023. Gold tumbled on the news, losing about $90 an ounce at its low point the following trading day, down to the $1770 range. The market’s thinking is that higher interest rates make non-interest-bearing investments, like gold, less attractive. Higher U.S. rates also typically drive the U.S. dollar higher, which makes gold more expensive in its largest markets overseas.
This knee-jerk reaction may be an overreaction—and set investors for good buying opportunities in gold.
First, the Federal Reserve is still saying it plans to hold short-term interest rates near zero percent for the next 18 months, and is nowhere near a decision to raise interest rates.
“You can think of this meeting that we had as the ‘talking about talking about’ meeting,” Chairman Powell said, referring to “talking about” raising interest rates. “Liftoff is well into the future,” he added.
Without question, there will be new developments over the next 18 months that will influence the central bank’s thinking on interest rates.
We do know that the Fed is committed to encouraging higher inflation. So far, Fed governors have said price increases are likely to be transitory, which implies the central bank will continue stimulating the economy with low interest rates.
The bottom line is that interest rates are likely to remain low for an extended period, while inflation is likely to rise. Over the long-term, this is a bullish scenario for gold prices.