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Gold: Ukraine War, Fed Rate Hike – But Real Interest Rates Remain Negative

The price of gold was only recently able to rise above $2,000 again, helped by the invasion of Ukraine by Russian troops. That was almost 4 weeks ago, and the fighting in Ukraine continues to drag on, while on the other side the peace talks have not yet made any significant progress. So the situation remains confused. Late in the week, Ukrainian President Volodymyr Zelenskyy again addressed Western powers via live feed, calling on the U.S. to do more to stop the Russians. But whether that will really accomplish anything in the end, aside from sanctions, remains to be seen.

Towards the end of the week, the Fed decided at its FOMC meeting to raise interest rates by 0.25% to 0.5%. This is to signal to the population that they have noticed the rising inflation and now want to take measures to stop it. For those familiar with inflation and interest rates, it’s easy to see that the Fed’s rate hike is just a drop in the bucket, because the official inflation rate has already risen to 7.9%, and real inflation to over 15%. That means real interest rates remain well into negative territory. Fed officials see average inflation continuing to rise in 2022. FOMC members see inflation at 4.3% in 2022, more than double the Fed’s inflation target.

Negative real interest rates are probably the most important driver of the gold price, as the Fed’s massive money printing has paved the way for rising inflation. This is causing commodity prices to rise and ultimately the price of gold. Gold has been used as a medium of exchange for over 5000 years. Its status as a safe haven is still valid today, which is very easily seen in the actions of central banks. They have been increasing their gold holdings for several years because gold is considered a safe investment. The price of gold will continue to rise due to rising inflation, which will be unstoppable in the long run. As inflation rises, people will become increasingly concerned about their purchasing power. This in the end will be the bullish factor for gold, because it always has been.

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