One of which is monetary policy. The impact of monetary policy on gold isn’t immediate but it’s significant.
Monetary Policy Defined
Independent central banks implement monetary policy to attain macroeconomic goals for their respective countries. These goals include high economic growth, low unemployment and low inflation.
The US Federal Reserve System is the most well-known and most influential independent central bank in the world. Its monetary policies are described as either dovish or hawkish.
As a central bank, two of its functions are to control money supply and to govern interest rates. Its monetary policy is deemed as dovish when it increases money supply. If it restricts money supply, it’s regarded as hawkish.
Lowering interest rates also falls under dovish monetary policy. Increasing them is under hawkish.
Before the Feds provide loans to commercial banks, it requires them to have a certain amount of money in the central bank or in their vaults. Reducing the amount means the banks can borrow more money. Later on, they’ll be able to provide more loans to their clients.
That is actually a process of boosting money supply. Printing more paper money is another method.
Increase in money supply could lead to inflation. When the prices of goods increase, expect many investors to turn to low-risk assets such as gold.
Name any other product that investors and consumers like to buy. There’s no such thing aside from gold.
Consumers love the precious metal as a component of their jewelry. It’s partly because of gold’s shine. However, the perceived value of the yellow metal mainly prompts consumers to invest on it. Its relative rarity influences such perception.
In many cultures, having gold is also a status symbol. It shouldn’t be surprising that you can pawn it in many countries. If you’re in another country, the precious metal may even be more preferable than US dollars (or any other foreign currency for that matter).
The perception towards gold’s value won’t change anytime soon. As such, many investors consider it as a safe asset compared to stocks or shares. The metal’s physical durability further helps it stand out against other commodities and assets. Both consumers and investors also know that gold is easier to liquify than bonds or even other investments.
Influencing Gold’s Prices
As the demand for gold increases during inflation, expect its value to increase as well. The said increase may not be that high and long-lasting though.
Keep in mind that the Fed may step in when inflation is too much. It may set high interest rates and restrict money supply. Moreover, it may increase the amount that banks must have before allowing them to borrow again.
The possibility of a hawkish monetary policy prevents gold traders from increasing the price too much. But even without major increase, the precious metal remains valuable. The value may decrease but it won’t be excessive either.
Furthermore, the Fed doesn’t always interfere when there’s inflation. As such, investors, consumers and traders can feel at ease when taking advantage of gold.
But when Fed introduces a hawkish monetary policy, it’s certain that it will stop gradually as the economy stabilizes. Many experts consider it as part of a cycle. During the period of dovish monetary policy, the price of gold increases steadily and significantly. This is seen more of a long-term impact of hawkish monetary policy.
While monetary policy is influential in the gold trade, you should remember that it’s not the only factor that affects the price of the precious metal. As such, not all cycles will lead to significant and long-lasting price increase.