Market News

The Fed won’t lift rates — and 4 more reasons gold is a buy

IMF chief warns of “fragile” global economy with “downside risks”

For its 54th straight meeting the Federal Reserve kept interest rates at record lows at the conclusion of its two-day conclave Wednesday. With its post-meeting statement leaning toward dovishness, goldremains trading near $1,100, with the next big datapoint coming Thursday with a second-quarter GDP estimate.

No one was expecting the Fed to move Wednesday on raising rates, with September’s meeting seen as the more likely liftoff date.

The Fed’s harshest critics, of course, don’t think the central bank will be raising rates at all this year, and a new post-meeting article from The Wall Street Journal seems to signal that now even a September action is in question.

“Nagging concern” on inflation: What’s the Fed’ latest reason to stay put? Fed insider and WSJ reporter Jon Hilsenrath noted that while the bank “remains on course to raise interest rates in September or later this year,” it also “flagged a nagging concern about low inflation, which is creating caution among officials and could convince them to delay the day of the first increase. … They said inflation continued to run below the Fed’s 2% objective and said they were continuing to monitor inflation developments closely, a sign of some trepidation about its low level.”

With the Fed’s official statement almost nearly identical as its June verbiage, gold neither gained nor lost significant traction Wednesday. However, another top official issued a diagnosis on the global economy, and it’s not inspiringly positive: the chief of the International Monetary Fund, Christine Lagarde.

“Tepid growth” at best: "If I look at the global economy as it stands at the moment … we have a situation where growth is a little bit tepid," she said. "We have recovery, but it's fragile, it's unbalanced, and there are some downside risks on the horizon."

The Fed is under great pressure to raise rates. Doing so would be a confirmation that its policies have fixed our economic woes. Moreover, prolonged low rates are dangerous. They distort markets, build bubbles, and tend to spawn harmful inflation. So Fed chief Janet Yellen and company want to hike rates.

But their inaction — along with the statements of Hilsenrath and Lagarde — speaks volumes about the economic uncertainties that remain, from Greece and China to America’s own struggling recovery. Gold at five-year lows therefore remains a compelling investment.

Contrarian buy signs are building: Just look at the latest MarketWatch headline: “Investors are sick of gold, and that’s why it’s time to buy now.”

“Sentiment is already gloomy enough,” wrote Michael Brush. “It’s time to buy gold — at the very least for the bear market rally that will soon take the metal 10% to 30% higher, say several gold experts.”

Brush lists four reasons why gold is a go-to investment now: 1) sentiment is extreme; 2) dollar strength is unsustainable; 3) China growth is picking up; and 4) gold season is around the corner.

For these reasons and more, precious metals remain key building blocks in diversifying your portfolio against global uncertainties.