Do you ever stop to think about what inflation actually is? Because of inflation, prices are going up, which implies that the same amount of fiat money will get you less goods and services. A moderate level (about 2%) of inflation is beneficial to the economy; but, high levels of inflation, deflation, or volatility are very unhealthy to economy and created a tremendous deal of uncertainty. The Fed is dedicated to ensuring price stability. They do not have any direct control on inflation, but they do have tools at their disposal to exert indirect control over inflation. Interest rate or more precisely the Fed fund rate is the primary tool that the Fed has at its disposal.
By reducing interest rates, the Fed intends to stimulate the economy and bring about an increase in inflation. When the interest rate is low, it is cheaper to borrow money because the amount of interest that you have to pay is also lower. This makes it simpler for individuals and businesses to take out loans and spend their money. Demand rises to meet higher levels of aggregate spending. Prices will go up in response to an increase in demand.
By raising interest rates, the Fed intends to accomplish two goals at once: slow down the economy and bring inflation down to more manageable levels. When interest rates are increased, borrowing money becomes less appealing as an option. This guarantees that individuals and businesses will spend less money, and as a result, demand will decline. Price will go down, which will have the effect of bringing inflation down. Ray Dalio's video explaining inflation is the best economics 101 video ever made, and everyone interested should watch it.
Gold/silver prices and interest rates almost always move in opposite directions. It would appear that the prices of precious metals perform significantly worse than the stock market or cryptocurrencies when the interest rate starts to lower. But, once the interest rate hike has taken place, the prices of precious metals perform far better than, say, Cardano.
I’m sorry, Cardano fans.
I know that silver and gold are still going down, but compared to some altcoins that are down 90% (or even 99%) from their all-time high, precious metals are just the better investments and hedges. People fear the bear market because nothing will come out of it unscratched; everything will go down against the dollar. For a trader, the important question to ask during the bear market is “Am I long dollar or short dollar?”. For the long term investors, the best strategy is to keep buying the dip, as timing the market is a very tricky thing to do. Keep buying the dip of strong commodities like silver and gold with disposable income, which is not FA of course.
Great strength in precious metals over the years when compared to crypto. It shows the need why stacking gold and silver should be embraced
Most of the time, reducing interest rate really plays little when it comes to sustaining a healthy economy
Inflation really matters in prices which shows a sign of progress in achivieng profits in Investments.
A good analysis, but there's an assumption that everything is measured against the dollar. I wonder for how long this will continue to be true ?
The recent actions of the US have caused a number of countries (not just Russia, but also China, India, Saudi Arabia and even Israel) to de-dollarise some or all of their forex reserves. Bilateral trade deals between them (particularly Russia, China & India) are being conducted in native currencies rather than dollars; the BRICS countries and possibly the SCO (Shanghai Co-Operation Organisation) are working on setting up reserve currency arrangements based on a basket of their currencies.
So in the mid to long term, the dollar's dominance as the global reserve currency is being challenged by both crypto and non-dollar currencies.
I can imagine the outrage of the countries that are forced to use the dollar as the currency for exports and imports. Most countries strive tirelessly to raise their GDP; China, using its mercantilism approach, has been working their butt off to reduce the value of its currency and increase exports. Germany and Japan manufacture and export a wide variety of high-quality goods. That's how every country (or at least the vast majority of them) "makes money." Meanwhile, the U.S., a twin deficit country (spending>revenue and imports>exports), get to print a lot of money and watch the DXY rise to new heights. All that thanks to the dollar's status as the world reserve currency. I am aware that these countries are pissed, but I am uncertain whether there is a currency that can replace the dollar for now.