Gold prices edged down to close out 2020 as U.S.-China trade pact appears to have raised the prospect of a less risky investment strategy in the near future. If you thought that the Federal Reserve’s pursuit of boosting its own stock of assets, particularly of its own bonds, by selling assets has had a destabilizing effect on the financial system, the threat posed by the new trade deal will provide further impetus for investors to start looking at alternative ways to shelter their money in the future.
Central banks and other financial authorities around the world have pointed to the threat posed by the global credit crisis as the main factor in helping to encourage investors to turn to riskier investments. They are making attempts to strengthen their position as the Federal Reserve holds back from any full-scale monetary expansion.
A number of commentators believe that the level of the US dollar on which the current gold price index is based may be a negative indicator, although this is difficult to see in the case of the FED’s policy of buying up massive amounts of US treasury securities to generate a cushion for financial institutions against further financial shocks. No decision has yet been made as to when the FED might begin to increase the monetary base in the U.S., although it is unlikely to be until after the debt ceiling debate in Congress.
Gold has been the one financial asset which have resisted the economic and political shake-up, and its price continues to go up despite all the uncertainty that surrounds it. The question that now arises is whether it is possible to accurately predict gold prices without the influence of the Federal Reserve, or the threat that it will influence the behavior of the market in a way that ends up compromising the purchase of other asset classes.
Gold has been seen as a very valuable part of the economy, and as a vital commodity for those financial markets, which play a critical role in the way the economy operates. It is a relatively stable product which cannot be easily manipulated by other investors and has held its value much better than some of the other very volatile financial products.
Yet, the Federal Reserve’s concern about the weakening U.S. dollar has given gold a further lift as it has become easier for investors to purchase foreign exchange and commodities, both of which have begun to rise in price. It is a direct result of the Federal Reserve’s efforts to raise the cost of borrowing for the banks, as it weakens the market by injecting a little of its own money into the process.
These efforts have affected the purchasing power of individuals and major banks, creating a situation where a situation has arisen whereby investors can purchase either gold derivatives. Investors can benefit from the rising prices in the gold and commodities markets by buying their own gold on margin, which is another way to purchase gold and commodities.
The price of gold derivatives is most clearly defined as a kind of insurance contract between the seller and the buyer. Although there is a financial premium involved, it is important to realise that the price of gold is determined by the level of the US dollar on which it is traded, with the threat of the strengthening US dollar creating a strong deflationary force in the market, as it makes trading in other currencies, particularly in China, a more risky proposition.
The Global Depository Clearing Corporation is not an element of the Federal Reserve system, but has become a relatively powerful force over the past ten years. It is in the true sense a specialist entity with the authority to create and transfer contracts that allow currencies to be exchanged, as well as buying and selling gold.
Gold is not controlled by the central banks, but continues to move against the direction of the trade on the stock market. As the real and perceived value of the dollar remains strong, and the value of other commodities remains weak, it is expected that investors will continue to invest in gold to hedge against financial risks.
This may help to place the FED in a position of strength in the credit markets, but there will be questions to ask about the extent to which this can be achieved. in the context of the diminished economy.