Gold movement and Interest rate hikes in the biggest economy. Here's what you need to know!

During a time of volatility, the words; 'it's not about timing the market but rather time in the market’, come to mind. Here's why...

Recently, the Federal Reserve announced that it would be making $2 trillion in funds as part of its emergency loan program to bring further stability to the U.S. banking system. This will help make funds available to banks when necessary to avoid the same bank run effect that played out with Silicon Valley Bank (SVB). 

In this case, the fund injection for the U.S. banking system brings more money into the economy. Markets will only know the banks participating in this program by 2025. According to JPMorgan Chase & Co, "the Federal Reserve's emergency loan program may inject as much as $2 trillion of funds into the U.S. banking system and ease the liquidity crunch"- on top of the existing $3 trillion in the system.

The decision resulted in the markets being more sceptical about whether the FED will be hawkish (0.50 basis point and above) or be dovish (0.25 basis point and lower) - given the current inflationary environment. To give some context, interest rates are a tool the central bank uses to fight inflation; higher rates may result in a higher dollar - increasing borrowing costs. 

On Wednesday, Fed chairman Jerome H. Powell announced that the Fed will raise rates by another 25 basis points. This was what the market expected (priced in), and as a result we saw most U.S. stocks rallying, although this later reversed (despite the dovish move). 

By the end of the day, the Dow Jones Industrial Average fell 1.63%; the S&P 500 dropped 1.65%; and the Nasdaq Composite 1.6%. This was after the fed chair added that the FOMC will continue to monitor various data points to determine whether they should be hawkish or dovish in fighting inflation (being cautious around what transpired with SVB).

How does this affect other markets? 

Countries that hold the U.S. dollar as a reserve currency may pay more for what they have borrowed. Many countries own and borrow the dollar, given the U.S. economy's stability and the fact that most commodities are priced in dollars. 

Locally, South Africa is an emerging market expected to raise interest rates by 25 basis points. According to Jee-A van der Linde of Oxford Economics Africa, the SARB's Monetary Policy Committee (MPC) will also consider the recent spike in banking sector stress in the U.S. and everywhere else. 

Gold prices 

Not all closed in the red. On Wednesday, given the inflationary fears (where gold is considered a hedge against inflation), the gold spot price rose as investors considered inflation data. Local or international factors can introduce inflation. The U.S. dollar also fell during that time. Gold stocks tend to move relative to gold prices but can also be influenced by the specific company's fundamentals (including size). On EasyEquites, local gold stocks are up at least between 20- 35% from last month at the time of writing. These include Anglogold Ashanti Limited (27%), DRD Gold Limited (20%), Gold Fields Limited (35%), and Harmony Gold Mining Company Limited (32%).

Deresh Lawangee, the CEO of RISE, RISE a fund administration and investment management business owned by EasyEquities, added that, "gold is a popular investment to hedge against inflation because its value typically rises when the cost-of-living increases. The inclusion of gold can help diversify your investment portfolio. However, investors should note that gold is a non-yielding asset class in an increasing interest-rate environment".

RISE Chief Investment Officer Duane Gilbert also said that the Fed's latest 25 basis point rate hike reaffirms their commitment to fighting inflation."I think the market reads too much into whether the hike is 25 basis points or 50 basis points. Typically higher U.S. interest rates hurt the gold price as gold is a non-interest-bearing alternative to government-controlled risk-free assets such as Dollars and U.S. Treasuries. However, the events at Silicon Valley Bank have undermined confidence in the U.S. banking system, and gold is showing its value as the ultimate safe-haven asset."

As an investor, it would be necessary to also take into consideration other inflation data, as this may indicate where inflation may be heading in the short to long term. 

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Sources - EasyResearch, Bloomberg, JPMorgan Chase & Co,Oxford Economics Africa, RISE