Gold prices have been high over the past decade, primarily reflecting the increasing wealth of the global population—but were those prices warranted? It is an important question for gold traders, who speculate on the price of gold, so keep reading if you want to trade gold successfully.
Given the financial crisis of 2008-2010, many economists (and gold traders, since they often follow the economy closely) now believe the increasing wealth of the global population over the past decade was not real. In other words, people were not becoming richer because they were more productive; they just seemed richer because the U.S. Federal Reserve Board lowered interest rates, thereby creating a culture of easy money. Individuals did what was natural and borrowed, then bought, driving up the real estate and consumer goods markets.
But as we all now know, the Fed’s actions were a Catch 22. While the policymakers may have stimulated the U.S. economy in the short-term, they also created a bubble, the bursting of which we are now experiencing.
A Gold Traders Outlook for Gold Prices
What does that mean for gold traders? When the Fed is concerned about the economy, it inflates the U.S. money supply by lowering interest rates and selling U.S. government securities. It did so dramatically through 2008-2010, creating an excess of liquidity in the money markets. All of that extra liquidity diluted, and thus lowered the value of, the U.S. dollar. And, as most gold traders know (and we explained in “Understanding Gold Prices and the U.S. Dollar”), gold prices normally rise with a fall in the U.S. dollar.
Currently, gold traders—and thus the gold market—seem to think the Fed will stop at nothing to try to boost the housing and financial markets—which could bode poorly for the U.S. dollar and well for the price of gold. As a result, gold prices are high and could go higher. It could be a good time to trade gold, especially if you are buying.
Here is one thing to consider before trading gold, however: The Fed has already exhausted the first tool at its disposal, interest rates. It is now focusing on other methods of injecting liquidity into the money markets, such as buying government securities. But the Fed is likely concerned about going too far, and will eventually run out of ammunition, leading the money supply to decrease—in which case gold traders would need to change their strategies.