Q.”Timon in your Money Morning Gold article you mentioned if the Fed decides to cut interest rates by over 125 basis points in the next quarter then gold will rally. Could you help explain your thinking process?”
A. Sure, I can help.
Remember when it comes to interest rate cuts it means the following:
Stimulates economic growth
This makes borrowing cheaper as interest rates are lower.
And it encourages more spending and investments by individuals and businesses.
Boosts buying from consumers – Also, with low interest rates it entices people to buy more.
And this is because the cost of loans drops. This leads to them buying more homes, cars, and other goods.
There are other elements, but you get the idea.
Now, lets consider why lower interest rates could mean the gold price will rally For those of you who missed my article you can read it here: Gold Outlook 2024
Reason #1: Lower interest rates and a weaker US dollar helps the gold price
When interest rates drop, the yield on bonds and savings accounts typically declines.
And a weaker dollar makes gold cheaper for people with other currencies.
It’s like gold goes on a global sale, and everyone wants a piece!
So, this will drive up its demand and the price.
Reason #2: Investors get out of low yielding markets and into gold
Remember that when interest rates are high, investors move to high yielding markets.
They like to keep their money in the banks, bonds, money market or any other high interest savings accounts.
But when interest rates drop, investors don’t make much of their money from these assets.
And so, they will look to invest in markets like gold, which will drive the price up.
Reason #3: The gold safe-haven will prevail!
With interest rate cuts, it normally signals signs of economic uncertainty or weakness.
And during these times, investors will often seek out safe-haven assets.
Gold is a classic example of a safe haven that investors will look to buy.
And this golden attraction will help push the price up.
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Q. “I heard that there is a phenomena called “Lazy February”. Could you explain why it’s called that and what I should watch out for as a trader?”
A. I have not heard that term in eons! Here’s my 10 cents on how February got this name.
Short month effect
February is the shortest month of the year.
And because so much happens in February, many investors like to play it safe and observe.
Most investors tend to wait for March when the markets have chosen a direction, earnings are out, taxes are paid and they are ready to invest again.
Year-end position squaring:
Traders often close out their positions at the end of the year right through to January.
And this is for accounting, performance evaluation and tax purposes.
This process is known as “position squaring”.
But the big influencer is tax.
Closing off the tax year
In many countries, February is a time when individuals and corporations start preparing for tax filings.
And this can influence investment decisions which can lead to either selling their positions or adjusting their portfolios for tax efficiency.
After February and going into March, we should see a higher volume of buying and investing in the markets.
Earnings season
February is also known for major earnings releases – Especially in the U.S.
Investors during this period prefer to watch and observe.
This way they’ll be able to see the forecasts versus the actual results.
Once the numbers are released, that’s where they’ll have more of an idea of what they want to invest in and what to buy or sell in March and the coming year.
