Fed’s Manipulated Balloon Helps Gold
As the Federal Reserve has halted the rate hikes in recent months, investors have been left wondering what will happen next. Whether they will be able to move money into equities, and whether inflation will increase to a more sustainable level. In the meantime, gold and silver may be able to ride the ‘hot air’ created by the Fed’s actions.
Inflation forecasts are slightly higher than thought
While inflation forecasts are somewhat higher than expected, they still are below the central bank’s target for a two-percent growth rate over the forecast period. Despite the increased forecasts, there is still plenty of uncertainty.
A number of factors are expected to contribute to inflation over the next year. In particular, labour costs are forecast to continue to rise. Capacity constraints are also expected to add to the upward pressure on prices. These include the war in Ukraine, pandemic-related supply chain disruptions, and increased input costs.
Energy prices are estimated to add significant inflationary pressures. Retail energy prices are projected to rise 20 to 30 percent over the next couple of years. This will help keep underlying inflation above the forecast level. However, it is expected that prices will ease later in the forecast period.
Inflation is much too high in the equities market
If you’re looking for a good way to beat inflation, investing in equities may be your best option. The S&P 500 Index, for example, returned more than 7.9% annually in February.
However, the value of such returns is much smaller when inflation increases. The chart below shows the effect of inflation on purchasing power.
As prices rise, consumers feel the pinch. They’re less likely to hold cash, causing credit to become more expensive. In turn, they may cut back on discretionary spending and invest less. This can cause a recession.
One way to mitigate the effects of increased inflation is to find an inflation hedge. This can be done in a variety of ways. For example, a potential inflation hedge is a diversified portfolio of bonds, real estate, stocks, and cash. It can also be done by investing in commodities.
Investors left unsure of what the central bank will do next
The Federal Reserve hiked benchmark interest rates in March. Investors were hopeful that this move would slow inflation. In fact, it seems likely that the Fed will continue to hike rates, but may slow the pace of the rise early in the year.
This is not the first time the Fed has stepped in to support markets during a market downturn. After the Great Financial Crisis of 2008, Fed Chair Ben Bernanke implemented the first round of quantitative easing, or QE.
During this period, low borrowing costs encouraged consumer spending. However, that was overshadowed by elevated inflation.
Inflation rates remain persistently high. As such, the Fed has shifted its approach toward more aggressive monetary policy.
Several countries have stepped back from rate hikes, including Australia and Norway. Meanwhile, Japan has yet to undergo a rate hike.
Investors react to the Fed’s decision to stop rate hikes
The Fed’s decision to suspend rate hikes is being met with a range of reactions. Whether the move is a good idea or bad, it will impact the economy in the short term. But what will be the long-term impact?
Analysts are speculating whether the Fed’s decision will slow the overheated economy or cause another recession. It is also possible that the Fed’s actions will tamp down inflation without adversely affecting the economy.
The Fed has raised the fed funds rate since December 2007, when the economy was in the midst of the worst economic downturn in nearly four decades. In June, inflation reached 9.1 percent. While a significant decline in inflation has occurred, the economy still faces concerns about surging consumer prices.
Sprott Physical Gold Trust PHYS is a top risk-adjusted choice to potentially double any large gold gain soon
If you’re looking for an investment that offers the ability to invest in physical gold, the Sprott Physical Gold Trust (PHYS) may be a good choice. However, before you decide to invest in this type of fund, you should consider its tax benefits. The tax treatment is different from other types of ETFs, so it’s important to understand what your options are.
Unlike other top gold investment companies, PHYS does not require you to store physical gold in a vault. You can buy and sell units on any open trading day. Also, unit holders are eligible for redemption for physical metal on a monthly basis.
PHYS units are currently traded at a discount to the NAV, which is a sign of bearish sentiment. In order to redeem your units, you must meet a minimum redemption amount. This redemption value is based on a full-sized London Good Delivery bar, which is 400 ounces.