Gold has been in a bit of holding pattern since breaking out above $1,700, but the Federal Reserve has some investors wondering: What do indefinitely low interest rates mean for gold prices?

First, the Fed slashed its benchmark interest rate policy between 0% and 0.25% earlier this year, and it could be stuck in that range for quite a while.

In the most recent Federal Open Market Committee meeting earlier this month, the Fed announced it likely will not touch interest rates until 2022, meaning that’s when it believes the U.S. economy will fully recover from the novel coronavirus pandemic.

And that could be just what gold bulls are looking for.

What Low Interest Rates Mean for Gold

Banyan Hill Publishing’s Brian Christopher thinks as long as the Fed keeps rates low, it’s a great thing for gold.

Q1 earnings Brian Christopher low interest rates mean for gold

Banyan Hill’s Brian Christopher.

“If you aren’t getting paid to own U.S. dollars, fewer people will own them for savings purposes,” Christopher said in a recent update for his Profit Line subscribers. “They’re more likely to buy gold … or even cryptocurrency.”

Christopher pointed to gold’s $23 per ounce rise on June 11 — right after the FOMC announcement — as the perfect example of the Fed’s impact on gold prices, and he believes it could break out and top its 2011 record high of $1,920 per ounce.

“It has already moved up $200 since the start of the year,” he said. “If it does so again, it would be at $1,920. That’s entirely possible.”

And stimulus from the Fed or government is only going to help gold out more in the long-run.

“Every time the Fed or Congress launches another plan to stimulate the economy, they fund it with money we don’t have,” Christopher said. “That’s good for the price of gold. The next one of these plans may be an infrastructure bill. And there’s the potential continuation of unemployment benefits as well.”

And don’t expect the Fed to change its tune anytime soon. Christopher points to one statement from Powell’s recent virtual Q&A session that exemplifies the central bank’s plan:

“We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates. What we’re thinking about is providing support for the economy. We think this is going to take some time.”

“Powell used those words to be emphatic,” Christopher argues. “He’s a learned person. ‘Thinking about thinking about’ was no slip of the tongue. The Fed is going to provide support to the economy for a long time because it believes the economy requires it. The Fed is scared of the effects COVID-19 will continue to have on the country.”

Because of this, near-zero interest rates are going to be the norm for a while — and that’s a great sign all safe-haven assets.

“Mathematically, keeping rates near zero means we will have negative real interest rates (interest rate minus inflation),” Christopher wrote via email. “Gold thrives in a world of negative real interest rates. Today, there are fewer reasons not to own assets that don’t pay interest … like gold, bitcoin and land. It’s not like you’re going to get 5% interest in your bank account. And the more U.S. dollars the government conjures up, the less value each new one will have.”

While the long-term prospects for gold are good thanks to the Fed’s low-rate environment, the short-term may be more up in the air as U.S. stock market indexes continue to rise on the hopes of a quick economic recovery out of the coronavirus lockdown.

Gold has waffled between the mid-$1,680s and high-$1,740s over the last month or so.

When looking at what could cause a breakout for gold, Christopher says to watch the rise (or fall) in COVID-19 cases.

“Interestingly, a large rise or fall in COVID cases could be the impetus to knock gold out of its sideways pattern,” he said. “We have observed gold prices are positively correlated to the number of confirmed U.S. COVID cases. To be clear, correlation is not causation. More likely, an increase in COVID cases leads to an increase in stimulus … which is good for gold. And vice versa.”

The Fed’s long view for the economy means low interest rate for at least a few years, and that’s bullish for gold.

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