Gold futures prices increased yesterday due to concerns about rising inflation in the US, with many market participants believing that the Fed should be raising interest rates now. The Fed’s dovish monetary policies are further weakening the US dollar, which is bolstering the gold price.
Traders and analysts are predicting that the Fed will not tighten its lax monetary policy fast enough. Its quantitative easing (QE) measures have propelled stock markets higher and helped American exporters, but have also seriously weakened the dollar against other major global currencies. Precious metals like gold and silver are profiting from investor concerns that the Fed’s current policies will lead to a rising inflation rate in the United States. For this reason several economists believe that the Fed´s ability to lead the American economy out of malaise is limited, with many citing the still-high national unemployment rate as evidence of this. Incoming data from the consumer price front is indicating that many companies are raising their prices.
Many economists credit QE with preventing a free-fall in the US economy, but concede that Fed monetary policy has not and cannot fix systemic problems with the economy. A sign of this is that the country´s debt problems are now more severe than at the start of the financial crisis. If Republicans and Democrats are not able to come to an agreement on significant government spending cuts, the country could face serious problems at the international bond markets.
China, one of the world´s largest purchasers of US bonds, just recently called on the US government to guarantee the stability of the dollar. As was revealed at the beginning of this week, the People´s Bank of China (PBC) – China’s central bank – is planning to set up special investment funds which shall act independently at the financial markets. These financial vehicles shall be capitalised with money from the currency reserves held by the PBC. China´s US dollar reserves amount to roughly $3.05 trillion. According to a Chinese state newspaper citing sources at the PBC, an independent currency market fund will be one of the new funds.
Commodity investors were also interested after the same newspaper said that the PBC intends to create a fund charged with purchasing oil and gold. The country is seeking ways of diversifying out of US dollar reserves. If China became a major direct buyer at the precious metals markets, this would surely push the prices of gold and silver much higher.
