The impact of monetary policy on gold and silver prices
Precious metals markets, particularly gold and silver, have experienced significant volatility in recent years, influenced by a complex interplay of economic and geopolitical factors. Monetary policy decisions by the US Federal Reserve are considered the primary driver of these markets. Historically, gold and silver have been viewed as safe havens for investors during times of economic uncertainty or dollar weakness, as there is an inverse relationship between the strength of the dollar and gold prices; when the dollar rises, gold prices, which are denominated in dollars, tend to fall, and vice versa.
Historical background: The relationship between interest rates and gold
The importance of the Federal Reserve's decisions lies in their direct impact on interest rates. When the Fed raises interest rates, the return on interest-bearing assets like government bonds increases, making them more attractive to investors compared to gold, which does not generate any yield. This shift in investment preferences typically leads to a decrease in demand for gold and, consequently, a decline in its price. Conversely, when interest rates are lowered, bonds become less attractive, and investors turn to gold as a hedge against inflation and a store of value, driving its price up.
The Trump era: Political pressure on the independence of the Federal Reserve
During Donald Trump’s presidency, the relationship between the US administration and the Federal Reserve reached unprecedented levels of tension. In late 2017, Trump nominated Jerome Powell to head the central bank, but the relationship quickly devolved into public criticism. Trump broke with decades of respect for the central bank’s independence, repeatedly criticizing Powell for raising interest rates, arguing that this policy stifled economic growth. This political pressure added a new layer of uncertainty to the markets, as investors began monitoring not only economic data but also the president’s tweets and statements, which could influence the Fed’s decisions.
Expected impact on local and international markets
This dynamic had a direct impact on gold prices. The more Trump criticized the Federal Reserve and called for interest rate cuts, the more gold prices received temporary support, as markets anticipated a more accommodative monetary policy. Internationally, uncertainty surrounding US trade policy and the trade wars initiated by Trump increased demand for gold as a safe haven. Investors worldwide, from China to Europe, sought safe assets away from the market volatility caused by tariffs and trade tensions. Thus, gold prices were not only influenced by monetary policy but also became an indicator of the level of tension in international trade relations, in which the Trump administration played a key role.
