The price of precious metals, especially gold, reveals the true economic state of U.S. If today's gold price is soaring high, it means that the economy is not healthy. It is because investors see gold as a safe haven on the verge of economic crisis. On the other hand, when the price of gold drops down, it signifies that the economy is healthy. Everything appears to be interdependent in modern complex economies, but it cannot be concluded that everything affects everything, including the value of gold.
According to Fed Chairman Jerome Powell, in his first speech on the economic outlook since assuming the helm at the U.S. central bank on February 5, growth is strong and more interest hikes are necessary. What does it mean? It means that rate hikes are needed so that growth doesn't go out of control. It also means that the federal reserve will likely need to keep raising interest rates to keep inflation under control. However, in his speech he failed to address the economic risks of rising trade tensions which could mean that he would walk back the rhetoric and signal a more patient view not only for rate hikes but balance sheet readjustment as well. It cannot be denied that the current trade disputes have a risk, but it does not affect the economy overnight. It appears that Powell is not affected or rattled by equity market volatility at this time.
With this being said, what happens then to the prices of precious metals? Basing from the economic state, there aren't any major changes yet – the turtle-like raise of rates would make it necessary for monetary policy to tighten which could jeopardize the economic expansion, but raising rates too quickly would increase the risk of inflation. The tightening of monetary policies and higher interest rates could be negative for gold, but the way the economy is recovering signifies that the prices of precious metals as of this moment will remain stable.
Recently, the price of precious metals has shown a remarkable resilience with the actions that the Fed is doing. The potential outcomes of a trade war could boost the demand for precious metals, especially gold, making the price increase gradual since gold is viewed as the most attractive defensive investment. Traditionally, defensive shares become cheap but nowadays, it is fairly expensive. This leaves fewer safe bets for investors and they tend to turn to gold.
