How Does Quantitative Easing Impact Gold?
Before investing in gold, there are a number of considerations that you need to make. Along with those about your wealth, needs, and investments, you need also to be aware of the current economic situation.
Economic policies implemented by the government can have massive impacts on the price and value of gold, so it’s best to stay informed. One such monetary policy is quantitative easing. Read on to find out what effect quantitative easing has on gold.
What is Quantitative Easing?
Quantitative easing refers to a policy in which the central bank of a country buys assets such as government bonds or other long-term securities such as mortgage-based securities. The aim is to increase the money supply, and also encourage investors and lenders. This not only increases the money supply, but also lowers interest rates by making fixed incomes more secure in the economy.
This also provides banks with a greater level of liquidity. An example of this took place on March 15th, 2020 because of the coronavirus pandemic, where the USA Federal Reserve announced the quantitative easing of over $700 billion.
How Does This Effect Gold?
When more money is pushed into the economy, naturally, the prices of all things increase. Due to this, the prices of gold also increase. Investors often take this as a good sign and conclude that quantitative easing increases the value of their gold, when this is not really the case.
Upon closer examination, it’s clear that the prices of gold do increase, but not as much as the prices of all other things. So, while the price of gold may be rising in nominal terms, but in real terms, it’s actually declining.
Gold and Quantitative Easing Tapering
Quantitative easing tapering refers to when the government puts an end to the quantitative easing policy. Historically, whenever this has happened, there have been massive fluctuations in the prices of gold.
As a rule, when there are fewer dollars in the economy, the price of gold rises rapidly, hence, even the slightest hint towards quantitative easing tapering can make gold prices skyrocket overnight.
This is why it’s important to be well-informed about economic policies and the current situation of the economy before deciding to invest in gold.
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