Recall that only last March, gold climbed to $2,000.
Of course it did. Inflation was roaring along, and there was nothing “transitory” about it.
Finally, the Federal Reserve got the message that inflation was beginning to run out of control. It promised to do something about it. It seems clear that the Federal Reserve’s decision to hike interest rates has given us this opportunity to acquire gold at lower prices. Now we must ask how long the opportunity may last.
Our answer is not long.
That’s because now, less than six weeks after the Jackson Hole gathering at which Fed Chairman Jerome Powell announced the central bank’s resolve to (mostly) wring inflation out of the economy, and less than two weeks since the Fed’s last hike in its policy rate, a fast-growing chorus of voices has erupted demanding that the Federal Reserve change course and make more inflation federal policy right now!
Before we go any further, let’s make it clear that the Fed’s half-hearted steps so far have not been enough to achieve much of anything on the inflation front. The latest numbers from the Fed’s preferred inflation gauge, Personal Consumption Expenditures, continue to show inflation in the red zone. In August, food prices rose at the fastest rate since 1979.
But even half measures to normalize interest rates are proving too much for some.
Because we mentioned last week to keep an eye on emerging markets with their mountain of dollar-denominated debt, we were not surprised to see the headline this week that the UN was warning of “imprudent” U.S. monetary policy:
GENEVA (Reuters) – A United Nations agency warned on Monday of the risk of a monetary policy-induced global recession that would have especially serious consequences for developing countries and called for a new strategy.
“Excessive monetary tightening could usher in a period of stagnation and economic instability” for some countries, the United Nations Conference on Trade and Development (UNCTAD) said in a statement released alongside its annual report.
The long knives have come out for Fed policy domestically as well. Most importantly are changes in outlook at the Fed itself, which puts a high premium on unanimous board decisions. But some members may be about to peel off in the credit-tightening cycle. Veteran Wall Street commentator Charlie Gasparino tweeted recently that “Federal Reserve officials [are] getting increasingly worried about ‘financial stability’ as opposed to inflation as higher rates begin to crush bonds…. Fed growing worried about possible ‘Lehman Moment’ [the prospect of bonds and derivative crashing due to higher rates] … given the enormous debt issued in just the past 3 years at super low rates.”
The jump in stock prices this week suggests that the market sees a substantial likelihood that the Fed will pivot again, with renewed monetary easing.
The evidence for such a turn can be seen in the UK. With its pension system in peril, it suddenly reversed course last week, from monetary tightening to a new round of bond-buying and money-printing to stave off the crisis.
Many appear to believe that the same will happen here. On that precedent, the U.S. stock markets have staged abrupt rallies. Gasparino says that a Fed watcher told him the UK intervention was not “a one-off” and the same systemic risk could happen here, which might cause the Fed to pause.
As James Grant has observed, “The Fed has shown little tolerance for economic pain.”
The Fed gave gold investors an interim gift last spring by promising to rid the U.S. monetary system of inflation. It has not yet done so. In fact, its interest rate increases have still left rates well below the inflation rate. Even so, pressure is mounting on the Fed to crank up the printing presses, buy down interest rates, and forestall the recession.
Sooner or later, it will ease monetary conditions just as the Bank of England did. It may do so because of recession, war, wobbling international banks, or an inability to service U.S. debt at higher rates. If it does so sooner, as the Bank of England did, the lower gold prices before us today will prove to have been an unexpected gift.
We believe in taking advantage of them while they last.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.