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What if Interest Rates Remain at Zero?

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Oct. 27 2015, Published 7:30 a.m. ET

A “what if” scenario

As fears are looming over the global markets, the chances are bright for interest rates to stay at their current level of zero. Gold is expected to move sideways until the Fed October verdict and will likely see a surge in prices after that. Gold is trading near $1,160 per ounce. As the policy-setting meeting kicks off today, investors are carefully looking for clues to the timing of the rate hike. The US dollar fell yesterday, curbing last week’s returns on the US Dollar Index. As weakness is prevalent in the Eurozone, Japan, and China, the chances are less that interest rates could rise in 2015. Let’s again consider a “what if” scenario, but this time we’ll assume the rate hike is postponed as expected.

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Global turmoil

As we see in the above chart, September’s delay in a rate hike pushed gold prices higher, and a similar move may be expected in October. A delay in the interest rate hike would mean that investors will keep their money invested in the shiny metal. Although the metal is non-interest-bearing and non-dividend-bearing like bonds and equities, respectively, at a zero interest level, it remains comparable to other assets. The safe-haven appeal of gold is likely due to the present economic global turmoil. Such uncertainties keep gold investments buoyed. As we expect the Federal Reserve to postpone the interest rate hike to 2016, gold may get some breathing room for the current year, and prices will likely rise.

An increase in bullion prices will also result in rising gold-backed ETFs such as the iShares Gold Trust (IAU). Also, mining equities listed on the exchanges may experience gains in their prices. Companies such as Goldcorp (GG), Sibanye Gold (SBGL), and New Gold (NGD) may see a rise. These three companies together contribute approximately 12% to the price changes in the VanEck Vectors Gold Miners ETF (GDX). GDX may also experience a similar rise in its price due to likely gains in gold.

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