Will gold prices continue to remain at current historic highs or will they fall as traders become concerned about possible U.S. rate hikes and inflation pressures? In order to answer this question, we must analyze global market behavior and gold price analysis to understand how investors may respond to elevated U.S. interest rates. Global market sentiment has recently turned bullish with expectations for U.S. rate increases and possibly additional federal stimulus measures. This may result in additional pressure on gold prices as traders look to hedge their exposure to higher U.S. interest rates. Traders may continue to press for higher gold prices ahead of Fed rate decision which may disappoint.
The current global financial crisis may have a somewhat negative impact on U.S. interest rates and may continue to encourage traders to purchase gold rather than risk cutting their margin exposure and potentially experience significant losses. However, even if the United States does not act, a record high of buying pressure may continue to push up the gold price rather than the opposite direction. This may result in a short supply and an oversupply scenario that may exceed current expectations and result in higher prices. Over the past decade, the United States had experienced an extreme amount of economic turmoil and market turbulence, which has resulted in significant increases in commodity and financial rates worldwide.
The historic U.S. inflationary boom has been over a decade long and is now beginning to subside. There are signs that investors are reassessing their long-term asset allocation strategies due to the current global economic uncertainty. With this shift in sentiment, there is also likely to be a move away from safe investments such as U.S. Dollar / Euro pair and Gold in the form of coins and bars. If the economy turns south for the worse and inflation becomes a problem, the Federal Reserve will most likely raise interest rates to cool the economy. Stocks and commodities are expected to suffer from this measure and Gold is very likely to experience an increase in demand. This will likely lead to higher prices on Gold futures.
Should U.S. interest rates rise above expectations, this could lead to a sharp depreciation in the price of Gold. Gold is not a particularly liquid commodity and would most likely incur large shipping costs, should it become popular simply to trade in the open market. It would also incur taxes which are currently levied on Gold sales. Should inflation lead to higher spending power and rising unemployment, the impact would be felt in the import cost of Gold futures. Gold Price Caps may act to limit the ability of investors to take advantage of the current low trading opportunity.
On a positive note, Gold is still considered one of the safest investment vehicles available and investors often remain loyal despite market volatility. The high level of confidence and trust in Gold is unlikely to change even amidst rising Gold Price Caps. In the end, investors may decide that the price caps are simply a necessary part of the process. With Gold becoming more expensive due to an increasing demand and supply, the recent volatility is simply the latest example of the law of supply and demand.
As supply increases, so does the price but as supply decreases, so does the price. This serves to balance out the market providing investors with an environment that is neither too volatile nor too bearish. The future for Gold, like all commodities is largely dependent on how investors react to changing conditions in the market. The markets will continue to perform based on their own self-interest rather than what is best for the market.
Should U.S. interest rates rise above expectations, this would result in more buying pressure and Gold would likely become overpriced once again. As Gold is not affected by interest rates, any increase in market volatility is likely to have a limited effect on gold prices as investors have been shown time and again that they do not affect the price of Gold. Stable markets with stable interest rates are less susceptible to price caps because investors would be forced to sell before the market begins to move. This scenario is unlikely to play out if U.S. interest rates rise significantly in the future.
Should the situation deteriorate and the market decides to reverse its trend, then Gold prices will likely fall below the current Gold price caps. This would result in a seller’s market in which all sellers are forced to liquidate their physical shares to cover their margin calls and any further losses. However, investors who have been patient due to a positive market trend may decide to hold out until the market resumes its upward swing. During this lull period, prices will likely return to the previous levels as traders and buyers dig in and wait for the market to resume its upward momentum.