All eyes are on the price of gold going into next week as gold has been consolidating above $1360 and hit $1440 last week.
Todd Horwitz, chief strategist of BubbaTrading.com, says if we break $1,450, we’re going to $1,500.
What’s Driving The Price of Gold?
The global economy is slowing down. About 6 years ago, the European Union (EU) lowered interest rates to zero. At the time, the EU said this was only a temporary measure to give EU member countries a shot in the arm to help spur growth. Fast forward to the present, reducing interest rates to zero didn’t work. Today the EU central bank still has achieved its goals and now, the EU is talking about going negative interest rates to try and boost member banks.
In the U.S., the Federal Reserve appears to be going down the same path that Europe did 6 years ago. The Fed is set to lower rates by a quarter point during their July 30-31st meeting.
If the Federal Reserve lowers rates, it will signal that the U.S. economy isn’t as vibrant and strong as we’ve been told. The U.S. dollar will immediately drop, gold will catch a bid, and I think there’s a chance that after the initial excitement of the rate cut fades, the stock market could sell-off because earnings growth is falling.
Negative Interest Rates
Yield refers to the interest rate paid on a bond. Normally, the higher the yield, the more interest paid to the bondholder.
When the yield is negative, it means investors are actually paying the bond issuer rather than vice versa.
France, Austria and Germany already have negative interest rates and its spreading across the EU. In other words, if you buy a French 10-year bond as a safe defensive way to preserver your wealth, you’ll actually get back less than you started with in 10 years when the bond matures!
Bonds are competition to gold when it comes to moving money into defensive assets in order to preserve value in a contracting economy and stock market. The more bond yields that go negative, the more that investors will move money into gold instead of those bonds because clearly gold is a better way to preserve value than bonds in countries with negative interest rates.