higher interest rates

What Happens To Gold Price If The Fed Doesn’t Cut Rates?

by

GOLD PRICE IF THE FED DOESN’T CUT

With the increasing gold price of late comes the assumption that the expected cut in interest rates will open a torrent of cheap money that will bring the U.S. dollar down with a thud.  But, what would happen to the gold price if the Fed doesn’t cut interest rates?

What seemed like a universally expected event may not be as likely as some have assumed. In fact, the Fed has a history that includes examples of pivots and re-pivots; or, ignoring the presumed pivot and staying the course.
You can read more about the possibility that the Fed might not cut interest rates in my article Investors Are Too Anxious For Rate Cuts.

In this article we will address the implications for gold if the Fed doesn’t cut interest rates. It matters not what the reasoning is behind such a possibility. What matters is that much of what has happened to prices for gold, stocks, bonds, etc., is based on the presumption that several interest rate cuts are forthcoming, possibly before the end of the year. Hence, there is a potential shock for investors who have relied on that presumption, as well as the particular logic mentioned in our opening paragraph above, should the Fed not follow through.

IMPLICATIONS AND POSSIBILITIES

Ignoring for now the finer (and more critical) point of inflation-adjusted returns, both gold and stocks are at all-time highs. What might happen to gold if a “potential shock” becomes a reality? It depends.

To the extent that a more significant portion of money used to fund the purchase of gold recently was done so based on the presumed cuts in interest rates and a clear change in direction, then we could see a significant decline in the gold price; at least temporarily. This might also happen if interest rate cuts are delayed. Market participants in both stocks and gold would likely see any inaction or hesitancy by the Fed regarding interest rate cuts as negative for their investment outcomes and expectations.

Another possibility is that any effects on the gold price could be muted. That has more to do with other factors, not interest rates. For example, if the prevailing thoughts dominant in the minds of those placing a larger portion of the money flowing into gold is not based on concern about interest rates, rather on anything else, then it is entirely possible that the gold price might show little reaction to non-cuts in interest rates.

OTHER FACTORS, SUMMARY

Some buyers in the gold market are not thinking so much about interest rates. Their concerns have more to do with the continual loss of purchasing power in the U.S. dollar. The erosion of U.S. dollar purchasing power is the result of ongoing inflation, which is the intentional debasement of money by governments and central banks. The continuous expansion of the supply of money and credit for more than a century has resulted in a dollar which has lost ninety-nine percent of its purchasing power.

Over time the gold price is historically correlated to that decline in the purchasing power of the dollar. Gold is real money and a long-term store of value.

Whether buyers of gold are individuals (retail investors), speculators, hedge funds, governments, or central banks; and whatever the reasoning behind their purchases, which reasoning is quite often temporary; in the end, it is still all about the U.S. dollar. (also see U.S. Dollar Best Of The Worst; Gold Best Of The Best)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Investors Are Too Anxious For Rate Cuts

by

INVESTORS ARE TOO ANXIOUS FOR RATE CUTS

Anxious investors seem to be expecting more than has been “promised” regarding interest rate cuts. Some (quite a few) seem overconfident that the long awaited pivot is a done deal. In addition, anticipated results from the expected cuts are already built into the markets to a large degree. Here are some thoughts worthy of consideration…

1) Suppose the Fed cuts rates later this year, but not as much as expected. Is cutting interest rates 1/4 or 1/2 percent all that is necessary to kick the gravy train into high gear?

2) Is a Fed pivot a temporary thing? Maybe the Fed cuts a quarter point once or twice, then re-pivots and begins raising rates anew.

3) What if the Fed doesn’t cut rates at all?

ANTICIPATION IS MAKING ME WAIT

(Thank you, Carly Simon, for the perfect subheading.) The possibility of three rate cuts in 2024 has been amplified to mean that the Fed will cut rates this year – 2024. The rate cuts most everyone is expecting are the same rate cuts that were assumed and expected for most of last year – 2023. Isn’t it possible that rate cuts could be postponed again? How long can elevated stock prices and other assets maintain their lofty levels based on the expectation of lower interest rates which continue to be expected but not realized?

IF THE FED PIVOTS, MIGHT IT BE TEMPORARY? 

Overlooked in the rush by everyone outside of the Federal Reserve to talk interest rates down are comments by Fed Chair Powell which include the phrase “higher for longer”. Those who are so intent on expecting lower interest rates might do well to consider not just the possibility, but the likelihood of rates remaining higher for longer. 

Rates were intentionally forced lower by the Federal Reserve over nearly four decades prior to the official announcement their campaign to raise interest rates in March 2022. During those four decades the Fed moved back and forth both higher and lower regarding interest rates, but all changes in direction were temporary within a long-term decline in rates lasting nearly forty years.

The emphasis on “lower for longer” took interest rates close to zero and created an addiction for cheap money and credit. The artificially low interest rates that fueled the addiction were not normal. They were abnormally low historically and created huge bubbles in asset prices. Financial and economic volatility increased and the U.S. dollar suffered a loss of credibility and purchasing power.

As a result, the Fed was forced to change its interest rate policy to protect and defend the dollar. Not out of a patriotic sense of duty, but in order to save the financial system. It may be too late for that.

That brings us to our final point. What if the Fed doesn’t cut interest rates?

WHAT IF THE FED DOESN’T CUT RATES?

It is very much a possibility that the Fed might not cut rates at all. The inclination to do so seems to change from week-to-week and month-to-month along with changing economic data and statistics. Jerome Powell has been consistent in his comments that “higher for longer” is the game plan. Maybe rates get kept at current levels for awhile longer.

At their current level, interest rates are still abnormally low on a historic basis. Historically normal interest rates average 7-8 percent. We are not there yet. And with the extreme lows for interest rates experienced for several decades, there is a significant amount of inefficient allocation of money and resources that needs to be reallocated. That will result in varying degrees of financial and economic pain.

CONCLUSION 

The Federal Reserve has a history of market intervention and manipulation. The Fed’s interest rate policy is a manipulation ‘tool’. The market intervention and manipulation is ongoing. The overriding purpose is to create and sustain an environment that enables banks to continue to lend money and collect interest in perpetuity.

Often, though, application of the ‘tool’ is a defensive reaction to unintended and unexpected financial and economic events. For many years now, the Fed has been occupied with battling the negative consequences of it previous policies and actions. They may be in the driver’s seat, but the vehicle is out of control.

Stormy seas are ahead. If the Fed cuts too soon or too much, the cheap bubble juice will create more inefficiencies and extreme volatility. Right now, just the expectation of a return to cheap and easy money/credit has blown bubbles in almost everything priced in dollars. At some point, bubbles get popped. That is something the Fed is trying to avoid.

Interest rate cuts are not a sure thing. Investors could be in for a nasty surprise. (also see Federal Reserve and Market Risk)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Gold And US Treasuries – Punctures In The Everything-Bubble

by

GOLD AND US TREASURIES 

The price of gold early Friday morning this past week touched $1720. At that level it was down $350 per ounce from its high point of $2070 last August.

The size of the decline is not unusual at face value. But, in light of the expectations for hugely higher inflation rates and much higher gold prices that have dominated the headlines over the past year, the drop might signal a cause for concern among gold bulls.

Meanwhile, eyes are fixed on interest rates for US Treasury bonds. During the same six-month period (August 2020 – February 2021) during which the price of gold fell by seventeen percent, the price of the 20-year US Treasury bond fell by twenty percent. That IS a huge deal, as it corresponds to sharply higher interest rates from less than 1% last August to as high as 2.26% just the other day.

The rush to proclaim correlation between interest rates and gold has resumed. Also, warnings and predictions of much higher inflation from around the globe are increasing.

As we have said on several occasions, there is no correlation between gold and interest rates (see Gold And Interest Rates – There Is No Correlation).

This can be seen on the charts below. The first chart (source) is a history of gold prices over the past fifty-six years and the second chart (source) is a history of interest rates over the same time period…

GOLD PRICES 1965-2021

 

10 YEAR US TREASURY RATE 1965-2021

During the 1970s, the price of gold rose from $40 per ounce to an intraday peak of $850. All throughout that time, the interest rate on the 10-year US Treasury bond rose higher and higher; from approximately 4% to 12.5%.

However, during the years 2000-2011, while the price of gold rose from $250 to $1900, interest rates on the 10-year US Treasury bond dropped from 6% to 2%.

The two decade-long periods provide contradictory results for the argument that lower interest rates are correlated to higher gold prices.

And for those who argue that the higher rates we are currently seeing are an indication of significantly higher inflation, then why is the gold price declining?

The higher interest rates are possibly a market reaction to the brutal effects of infinite credit creation and interest rate manipulation by the Federal Reserve.

The entire world economy is funded with cheap credit and most economic activity is dependent on it.  The prices for all financial assets misrepresent and grossly exaggerate any underlying fundamental value.

Higher rates might trigger a credit collapse so severe that any asset could decline in price by fifty percent or more.

As for gold, it would also decline – to a level commensurate with whatever strength the US dollar attains.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT  and  ALL HAIL THE FED!