What is the Federal Reserve’s Effect on Gold?

Fed’s View Gold As Safe Haven, Despite Excess Money Printing

Share Tweet Share

No one on the planet has more control over monetary policy than the United States Federal Reserve. Therefore, everything that the Federal Reserve or the “Fed” does has a wide-ranging effect on just about everything from stocks to the rates banks pay on your checking out. However, how does the Fed affect the price of gold? After all, gold is the stateless currency that has been perceived as the truest form of wealth. To really understand how gold holds it’s value, contact Allegiance Gold. One of our executives will help you understand how gold operates in a financial portfolio, and also ask them about our FREE Gold IRA Guide. Here, we will take a look at how the Fed’s action affects gold.

Gold Falls when the Fed Tightens Monetary Policy

When the Fed decides to tighten monetary policy and raise interest rates, this is bad news for gold. This is because gold does not pay a yield. Therefore investors will likely sell some of their gold and place their money in bonds or other assets that will pay a guaranteed higher interest rate. As an example, when former Federal Reserve Chairman Paul Volker started to dramatically increase interest rates in the early 1980s, the price of gold plummeted from a high of $614 in 1980 to $456 just 12 months later. 

Gold Rises when the Fed Eases Monetary Policy 

So what happens when the Federal Reserve decides to loosen monetary policy? Well, that’s when the price of gold begins to rise. This is because a loose monetary policy lowers the interest rates and makes money cheap. This will lead to accelerated printing of the US dollar which will make gold – a finite asset – more valuable. In fact, we have seen the price of gold rise dramatically in the last five years as interest rates have reached historical lows. 

Federal Funds Rate Vs Real Interest Rates for Gold

It is important to point out that real interest rates have a more dramatic effect on the price of gold compared to the Federal Funds Rate. The Federal Funds Rate is the rate at which banks can loan money to each other while real interest rates are what businesses and individuals pay to borrow money. Therefore, when trying to predict where the price of gold is going to go, it is more important to pay attention to real interest rates. 

Gold as the “Safe Haven” Asset to Fed Policy 

Many investors who own gold in their gold IRA see the precious metal as a safe haven against overly aggressive monetary policy. That’s because investors can perceive Fed policy as being destructive to the US dollar. Of course, if the US dollar becomes less valuable due to easy monetary policy, then the value of gold is bound to rise dramatically. This is why most investors are encouraged to hold at least a portion of their wealth in gold. 

How Does the Fed Feel About Gold?

The Fed is perceived as having an adversarial relationship with gold. This is because the Fed can not control gold as it can the US Dollar. Therefore, many Federal Reserve Chairmans have discounted the importance of precious metals. In fact, when former Federal Reserve Chairman Ben Bernanke was asked why the United States holds gold, his response was that it was simply “tradition” for the county to hold large gold reserves. 

The Future of Gold and the Federal Reserve

In 2008, the Federal Reserve started the unprecedented plan to enact quantitative easing on interest rates. This has led to historically low-interest rates that many people feel end up killing the dollar. However, the US dollar has remained somewhat resilient while gold has not been able to outperform the S&P 500. However, many gold investors feel that it is only a matter of time before the US dollar will experience a currency crisis which will lead to the hyperbolic rise in gold. 

Understanding the Fed and Its Effect on Gold 

Because the Fed has such a big effect on the price of gold, it is important that gold investors pay special attention to the Federal Reserve FOMC meetings which take place eight times a year. Also, gold investors should pay special attention to any public statements made by the Federal Reserve Chairman. For more gold education, contact the executives at Allegiance Gold or call 844-790-9191. Also, make sure to ask about receiving a FREE Gold IRA Guide or fill out the form below.