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Recent Actions by the Federal Reserve may Spark Demand for Gold and Silver

JP Buntinx
March 15, 2020

When looking at the current gold price, it is crucial to understand how the overall markets tend to behave. Currently, the US Dollar is causing the value of gold to decrease, primarily due to intervention by the Federal Reserve. 

The Federal Reserve Brings Many Gifts

Not too many industry experts are surprised by this action by the Federal Reserve. Injecting $1.5 trillion into the market will have some very serious consequences. Many traders expect it to push the value of stocks higher once again. That is, after all, the most logical outcome following this increase in overall liquidity. 

Such extreme measures often come at a long-term cost, however. While the measures taken allow for stock markets to rebound, it also devalues the US Dollar. As the supply is increased artificially, the existing amount of USD will lose value at the same time. That is not a smart move, given how the US Dollar is the world’s leading financial asset in global trade. 

To make matters worse, the Federal Reserve announced another crucial measure. The goal is to inject $500 billion into the repo markets as well. Creating ample liquidity out of thin air is always a very risky undertaking. It is not something that can be repeated indefinitely by any means. 

The gifts issued by the Federal Reserve don’t end there either. Earlier this week, the yield of US Treasuries dropped to a new historic low. To counteract that trend, the Fed will begin buying Treasuries again. This should, in turn, make these investment vehicles more appealing to investors and speculators alike.

A Positive Effect on the Greenback

Measures like these temporarily strengthen the US Dollar. In fact, the announced measures immediately fueled demand for the greenback on a global scale. This just goes to show how much power central banks wield in this modern day and age. 

Sustaining this level of market excitement will not come easy. Next week, the Federal Reserve has a monetary policy meeting. It seems likely to assume that the impact of these new measures will be discussed at length. Moreover, finding a long-term solution is still crucial.  

A possible economic collapse is still on the table at this time. Combating that negative outlook will pose its own set of challenges, both in the US and beyond as well.  It is certainly possible that additional measures will force people to look at alternative assets again. That can be a very bullish sign for gold, silver, and other metals.

Keep an eye on Gold and Silver

Despite some temporary setbacks, both gold and silver still look like prominent investments. Even from a technical analysis point of view, both markets have seemingly found solid support levels. That is crucial when looking at the bigger picture, rather than focusing on short-term momentum.

Depending on what the Federal Reserve will announce on Tuesday, the demand for precious metals may increase sharply. If more measures are introduced outside of artificially creating liquidity, the impact on stocks and the US Dollar won’t be positive.. For gold and silver, that may trigger a lot of bullish momentum for the remainder of next week. 

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