Yesterday US Federal Reserve announced an interest rate cut by 0.25%. We saw the Gold and Silver prices jump back up a bit as the announcement was made. Why?
Bullion, such as gold and silver, often thrives when the US Federal Reserve (Fed) cuts interest rates due to several key factors:
1. Lower Opportunity Cost: When interest rates are cut, the return on interest-bearing assets like bonds decreases. This makes non-yielding assets like gold and silver more attractive, as the opportunity cost of holding them is lower.
2. Weaker US Dollar: Interest rate cuts can lead to a weaker US dollar, as lower rates reduce the return on dollar-denominated assets. A weaker dollar makes gold and silver cheaper for holders of other currencies, boosting demand and prices.
3. Economic Uncertainty: Rate cuts are often a response to economic slowdowns or uncertainties. Investors tend to flock to safe-haven assets like gold and silver during such times, driving up their prices.
4. Inflation Expectations: Lower interest rates can lead to higher inflation expectations. Since gold and silver are often seen as hedges against inflation, their prices can rise in anticipation of higher inflation.
These factors combined create a favorable environment for bullion prices to rise when the US Fed cuts interest rates.
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