|Investors are expecting another rate cut from the US central banking system Federal Reserve. / Photo by itti ratanakiranaworn via Shutterstock|
Gold was steady at $1,504.60 per ounce on Monday after an almost 1 percent jump in the last session and while investors are expecting another rate cut from the US central banking system Federal Reserve, reported Reuters.
Gold’s Purchasing Managers’ Index
Gold’s September reading of the US manufacturing Purchasing Managers Index was at 51.1 and its October reading reached 51.5. The PMI is an economic indicator that is obtained from the monthly surveys of companies in the private sector. According to the stock market and financial news provider Investing, the PMI measures the activity level of purchasing managers in the manufacturing sector. If the reading is above 50, it signifies expansion in the sector. If it is below 50, it means contraction.
Traders are watching the said surveys because purchasing managers often have early access to the data of their firm’s performance that is also another indicator of economic performance. Gold was traded at $1,504.60 while investors were waiting for the next Federal Reserve meeting scheduled on October 29 and 30. During the meeting, economists are expecting that it will reduce its interest rate for the third consecutive time.
Despite the positive PMI data, however, London-based global information provider IHS Markit's chief business economist Chris Williamson warned that it is still a “weak growth” at it is just below 1.5 percent at the beginning of the fourth quarter.
|The investors’ high hopes for a rate cut benefited the gold market. / Photo by eamesBot via Shutterstock|
The gold market
Foreign exchange company AxiCorp’s market strategist Stephen Innes noted that the investors’ high hopes for a rate cut benefited the gold market. When the Fed lowers interest rates, they intend to stimulate economic growth as it lowers the financing cost and encourages investing and borrowing in the country. The target rate serves as their guideline for the rate that banks can charge on reserve loans.
Innes also pointed out that trades may be limited because the trade tensions are no longer as tense as they were in the summer. Last week, US President Donald Trump said that the country’s trade negotiations with China are doing “very well.” These words boosted the appetite of investors to go for riskier assets.
Another factor that contributed to the increase of gold prices to more than 17 percent this year is the series of tariffs imposed by China and the United States in the past months. The strong dollar is also making gold more expensive for buyers holding foreign currencies. Meanwhile, the price of silver fell 0.2 percent at $17.98 per ounce. Palladium increased 0.5 percent at $1,773 per ounce and platinum is still at $926.25 per ounce, the daily added.
How gold affects the economy
Kimberly Amadeo, who has more than 20 years of senior-level corporate experience in business strategy and economic analysis, wrote in the online financial platform The Balance that gold has an impact on the economy. An economist can tell how healthy a country’s economy is based on the price of gold. It protects the investor’s investments in case a stock market crash occurs. Countries also tie the value of their currency to gold. This is what is called the gold standard. In such a monetary system, the heavy gold bullion is not used for trade but the lightweight paper currency.
International financial institution the World Bank has also shared the following data about the total reserves of the US, including gold:
2000: $128.4 billion
2002: $157.763 billion
2004: $190.465 billion
2006: $221.089 billion
2008: $294.046 billion
2010: $488.929 billion
2012: $574.268 billion
2014: $434.416 billion
2016: $405.924 billion
2018: $449.907 billion
When the value of the US dollar falls against other currencies, it also encourages people to rely on the security of gold, the reason why gold prices also increase. The price of gold is also moved by a combination of investor behavior, demand, and supply. Investing in gold has been considered by some as protection from deflation or a period where prices decrease and the business activity is slowed down. To other investors, it is a form of portfolio diversification or diversifying their investments in combination with bonds and stocks to reduce the overall risk and volatility.
Here are the total reserves of other countries and economics (in millions): Afghanistan: 8,206.68, Belgium: 26,856.80, Brazil: 374,709.67, Canada: 83,925.60, China: 3,168,216.33, Dominican Republic: 7,717.56, France: 166,483.40, Germany: 198,027.06, India: 399,167.16, South Korea: 403,082.23, Malaysia: 101,452.53, Netherlands: 38,431.68, Philippines: 79,195.60, South Africa: 51,642.04, and Thailand: 205,640.63.
Gold as a hedge against inflation
Although gold nowadays is no longer used as a primary form of currency, especially in developed countries, it still has a strong impact on the currencies. Investors are purchasing large quantities of gold when their nation is experiencing inflation. An increase in the price of gold also helps offset the trade deficit. Moreover, a country that is a large importer of gold may mean they have weaker currency and will be more susceptible to increases in the price of gold. On the other hand, a country that has good access to gold reserves and exports gold will have a strong currency every time the prices of the precious metal increased.