Fed cannot sustain S&P 500 rally forever, gold to flourish

The Federal Reserve has left its policy unchanged, painting a gloomy picture whereas an open door to doing more implies further dollar weakness, exacerbating the falls. Stocks – that have benefited greatly from Fed support – may eventually run out of steam, according to FXStreet’s analyst Yohay Elam.

Key quotes

“The Fed’s acknowledgment of the deterioration is accompanied by a clear message – we will do more. Jerome Powell, Chairman of the Fed, may follow through with either more of the current tools such as more lending programs or standard bond-buying – or new ones, such as Yield Curve Control.”

“Flooding the markets with more dollars implies it may further lose value. The greenback’s unique position as the world’s reserve currency means cheap lending conditions could send funds overseas, boosting other currencies.” 

“For gold, the Fed’s commitment to do whatever it takes – even if that does not include negative interest rates – means more room to rise. Alongside much-hyped markets, forecasts for $2,300 or $3,000 for XAU/USD seem less outlandish.”

“The S&P 500 Index is around the break-even level for 2020 – mostly fueled by Fed action. Does more help mean more increase? At some point, there is a limit. Investors cannot take the Fed’s help while ignoring the reason for all this effort. Markets may look at the Fed’s underlying reason for supporting the economy and turn south as well.”

 

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