Will Fed Skyrocket Gold Prices?

As the economy gets worse due to various factors including defaults on loans and job losses due to the slowed consumer spending, investors seek out safe ways to convert their cash into a medium that will allow for growth in these circumstances. Precious metals, especially gold, are a great way for investors to protect themselves from the overall stock losses seen in this type of climate. When the economy is in flux and current salaries are lowered, investors have no real idea of when it will rebound. They end up buying gold and gold stocks, which in turn, raises the price of this investment vehicle as the demand increases.

The economy is kept in check by the lowering of interest rates to keep borrowing costs down and increase the flow of credit and lending from banks. The Fed dictates these interest rates and they have a strong impact on the economy and the gold prices specifically. When there is a recession, the Fed tends to lower interest rates to spur spending and lending, which increases inflation but also helps with a recovery.
Inflation is an indicator as to how money is flowing and many experts feel that inflation will begin to escalate now that the government is printing money hand over fist. Those who invest in gold have the opinion that as long as the Fed keeps inflation down, the price of gold will continue to rise, making their investments more valuable. But credit ratings agencies are considering changing the rating for government debt as they see the lending rates going up steeply in the next few years.

This raise in lending rates will lower inflation as they rise and fall inversely. Inflation is the amount of the rise or fall in consumer prices of goods and services and when it rises, can indicate some recovery. Raising interest rates would quickly squash any out of control inflation as it happens. As soon as the economy recovers, the price of gold will start to go down as investors will start to move from the safe-haven that gold represents to more risky investments such as stocks to increase the value of their portfolios.