Unless you’ve been living under your computer screen, you’re aware of the recent price action that is pushing gold dramatically lower. In the last six months since gold peaked this year, gold has depreciated by $400 an ounce, or 19.45%.
Questions that need to be asked and answered in order to formulate a forecast that has a reasonable probability of being correct require you to look at the current economic fabric at multiple levels. From different angles, so to speak; I’ve broken them down into three categories, the good, the bad, and the ugly.
But before we go any further, we need to set up the narrative that will lead to gold losing 20% in six months. In March 2021, the US Federal Reserve increased its policy rate for the first time since 2018. Beginning September 15, the Federal Reserve has hiked rates at every FOMC meeting that began in March. They started with a 25bp hike, a 50bp hike in May and a 75bp hike in June and July. The net result was that the Fed hiked rates from near zero to between 2.50% and 2.75%. Next week there is an 80% chance that the Fed will hike rates another 75bp.
Effects of Powell’s tightening monetary policy by the Federal Reserve
So the real question is what will be the consequences and hardships of the Federal Reserve’s recent rate hikes. The question is a lot easier to ask than pondering possibilities, but it seems likely that it falls into three categories: the good, the bad, and the ugly.
Inflation was at a 41-year high, with the CPI at 9.5%. The Fed has accelerated rate hikes so it can begin to effectively reduce extremely high inflation. Failing to act would be like the Federal Reserve waiving its dual mandate fiduciary responsibility for a single mandate, with inflation at an acceptable 2% level.
Over the past six months, Federal Reserve monetary policy has had minimal to almost no effect, pushing inflation up to 8.3% in August from 9.5% in June. Reducing inflation by just 1.2% in six months cannot be considered successful. Ask any middle-class American if they feel they have received some financial relief as inflation has fallen by a little over a percent. It seems highly unlikely.
On several occasions throughout history, Federal Reserve Chairmen have had to resolve and reduce high inflation. Paul Volcker, Alan Greenspan, and Ben Bernanke were all burdened with this issue. These Federal Reserve Chairmen all took an extremely aggressive stance to address the problem. Volcker, Greenspan, and Bernanke accomplished this task by raising interest rates above inflation levels. The path of the current Federal Reserve assumes that it can try something different and still achieve its intended goal of bringing inflation back to 2%.
However, the ugly truth is that it takes many more rate hikes and rates to stay high for much longer than most people realize to have a dramatic effect in lowering the level of inflation.
As of 5:45 pm EDT on a gold futures basis, December’s most active contract is down $35.20, down over 2% and fixed at $1673.90. This is a major break below a critical level previously supported. In tomorrow’s article we will look at the technical levels that gold could trade to if it moves further south. I had
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As always, I wish you good business and good health,
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