Inflation is at a 40-year high. What could this mean for the price of gold and silver?

The Federal Reserve raised its key short-term interest rate by a half percentage point on May 4th. This latest rate hike is the most significant rate hike since 2000. The Fed also indicated that additional big moves might still be coming as officials race to shrink what has amounted to a massive spike in inflation.

Unsurprisingly, stocks rebounded after Powell’s comments. The Dow Jones Industrial Average closed 933 points higher, or 2.8%, making it the highest one-day gain since November 2020. The S&P closed up 3%, while the Nasdaq Composite rose by 3.2%.

The central bank also said it would begin shrinking its $9 trillion in bond holdings next month.

We can expect this latest rate hike to trigger significant economic effects that would increase rates for credit cards, home equity lines of credit, adjustable-rate mortgages, and other loans.

Many analysts believe that gold prices will hold steady this quarter as investors seek shelter from skyrocketing inflation and risks like the Ukraine war before retreating later this year as interest rates rise, a Reuters poll showed on Tuesday.

Gold is often seen as a safe-haven asset because, historically, gold has been a trustworthy store of value. Gold’s value is uncorrelated to financial markets and an investment that investors can quickly turn to whenever other asset classes such as stocks, bonds, and properties face high volatility.

This time, the relationship has been amplified by fears that the aggressive pace of tightening signaled by the Fed to combat inflation may curtail economic growth, which could be positive for the price of gold.

“A geopolitical risk premium is likely to keep gold prices elevated short-term,” said Standard Chartered analyst Suki Cooper.

Gold rose above $2,000 an ounce in early March after Russia invaded Ukraine.

The median forecast for silver prices this year is $24 an ounce. Silver has a dual value as an asset for investors and a tool for manufacturers of goods, as silver has many industrial applications, including solar panels, automobiles, and electronics.

“Industrial silver demand is still rather sluggish in our view, as silver remains one of the few industrially used metals for which demand has not grown during the fast decade,” said Julius Baer analyst Carsten Menke.

“We still see investment demand as the dominant driver of silver prices.”

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