How the Fed’s inflation policy shift impacts the gold rally


Gold is looking even better after the Federal Reserve decided to tolerate higher inflation.

The precious metal rallied more than 2% on Friday morning, climbing back from the 1% drop in the aftermath of the historic announcement Thursday by Fed Chair Jerome Powell that the central bank’s inflation target could exceed 2% to offset stretches of weaker inflation.

The previous target has been an average of 2% over time. The change implies the central bank could keep interest rates lower for longer.

Delano Saporu, founder of New Street Advisors, says support for money markets from the Fed should keep investors interested in gold.

“You still have money supply increasing,” Saporu told CNBC’s “Trading Nation” on Thursday. “Safe haven investors are looking for another way to unlock value. With rates being as low as they are, you’re going to see some of them turn to gold to put that money to work.”

Lower interest rates and a weaker U.S. dollar have historically helped dollar-denominated gold prices. Gold has also benefited this year from increasing uncertainty around the pandemic and impact on the U.S. economy.

Gold hit a record high above $2,000 earlier this month, while the GLD gold trust ETF has risen more than 29% this year in its best annual performance since 2010.

“I think that’s what you’re going to look for is a momentum trade at least, at the very least, here with the gold asset,” Saporu said.

Nancy Tengler, chief investment officer at Laffer Tengler Investments, agrees that investors will favor gold in this environment.

“The reason people who own gold and liked gold prior to the Fed’s comments … those reasons are still in place — negative real interest rates, a ballooning of government debt, and the only safe-haven plays that we have now are Apple, Microsoft and Facebook. So I do think that that has not changed,” said Tengler.

However, she prefers to play gains in gold a different way.

“The attraction of gold remains. We can’t value it with our metrics, so we’re more interested in the miners, but if you own it, I would hang on to it. If you want to own it, we thought we would get a pullback a few weeks back. We got it. This might be a place to step in with a little bit of your free cash,” said Tengler.

The GDX gold miners ETF, which holds stocks such as Newmont and Barrick Gold, is up 43% this year.


Please follow and like us: