By Benedict Malcolm

The Federal Reserve recently increased interest rates as expected since earlier this year. It was the second interest rate increase in three months, though it was the first for the 2017 year. When the interest rate is increased, the value of precious metals like gold typically goes down. Gold does not generate an income and tends to lose out to assets that bear yields so this trend is only natural. However, this time around, the price of gold did not fall as expected, possibly signaling a new era for the yellow metal.

Gold Prices Following the Fed Rate Hike

Gold prices have been falling over the past several weeks following the announcement by Chairperson of the Federal Reserve Janet Yellen, to increase interest rates to boost the U.S. dollar. Gold is used as a hedge against the dollar. When dollar values are up, as it occurs when there’s a rate hike, the price of gold has historically gone down (live price charts). When the Fed finally hiked the interest rate last week, gold prices atypically bounced back almost overnight. By the morning of March 16, prices were up to $1,224 per ounce.

Though it looks remarkable to some, veteran investors and market watchers have pointed out that it was expected to happen. According to one commodity strategist, gold prices have gone up following the past two Fed rate hikes. In the most recent scenario, investors had anticipated the hike and “priced in” against the Fed. Market bets were quite high at about 80 percent preceding the rate hike.

Reasons for High Gold Prices

While the rate hike was intended to curb inflation, investors are expecting the “real” interest rates to remain negative. Some do not believe that the rate hike will be able to keep up with the rising rate of inflation. This scenario keeps gold prices high against the dollar.

The Fed rate hike may not have been the sole reason for the higher than anticipated gold prices. Investors were also closely watching the results of the Dutch general elections, where the far-right populist party of Geert Wilders, dubbed the “Donald Trump of Europe,” finished a distant second to incumbent Prime Minister Mark Rutte’s party. Wilders’s loss was seen as some as a loss to overall populist movements swelling across Europe that threaten to take liberal democracies to the far right.

With a loss like in the Dutch election, many were hopeful that the trend will continue in other countries and the need for gold “safe havens” would be less. Others however, are less hopeful and expect populism to rise and threaten the established economic order. Such sentiments drive the increased prices for gold.

“Safe Haven” Gold May Keep Prices High

So-called “safe haven” gold refers to precious metals investors buy to shield wealth from potential economic and political instability in their own countries or across the globe. Safe haven gold buying has been on the rise in the past couple of months following the Brexit vote and the election of Donald Trump.

While gold prices tend to fluctuate, the overall prices are inching upward. Last week, final session for gold prices ended 0.3 percent higher at about $1,204 an ounce in Asia, following a similar rise in London. While gold futures cannot be speculated at this point, it shows that investors are increasingly relying on gold more so than expected.

Author bio:

Benedict Malcolm is a full-time financial investor. Benedict spent 3 years working at a Wall Street financial firm before quitting to invest independently. Benedict currently invests mainly in tech stocks and precious metals. During his free time, he researches global financial trends, especially with regards to gold and silver.