"Everything you need to know about gold"
It is reasonable to suggest that interest rates might not have peaked. That statement applies to both short-term and long-term rates. Currently, the discount rate on short-term Treasury bills is 4.13%. Long-term Treasury bonds are yielding 4.97%.
Only five years ago, short-term rates flirted with zero and the 10-year Treasury rate was less than one percent at .89%. The increase in rates since early 2020 is something to behold. The damage to bond prices is evident on both charts (source) below…
BACKTALK FROM THE BOND MARKET
Investors keep looking to the Fed for supposed “forward guidance”. They are looking in the wrong place. Since mid-December, bond prices have declined another 5% and are currently at new 52-week lows. Here is an updated chart of U.S. Treasury Bond ETF (TLT)…
The Federal Reserve doesn’t know what to do; but it probably doesn’t make much difference anymore.
A dilemma is “a situation in which a difficult choice has to be made between two or more alternatives, especially equally undesirable ones.” (New Oxford American Dictionary)
We are hooked on low interest rates and the drug of cheap and easy credit. Maintaining low interest rates furthers that dependency and heightens the risk of overdose. The result would be a swift and renewed weakening of the U.S. dollar accompanied by the increasing effects of inflation.
On the other hand, raising interest rates more could trigger another credit implosion which could lead to deflation and a full-scale depression.
Doing nothing is an option. The problem is that the Fed is holding that “ticking time bomb” and doesn’t know how long it will be until its world blows apart.
WHAT TO EXPECT NEXT
Don’t trouble yourself worrying about who the next Fed chair will be. It doesn’t matter. It is too late in the game for a change to have any meaningful impact. This includes speculation that Judy Shelton might get nominated again. Yes, she is an excellent choice; and, for all of the right reasons.
Unfortunately, that would expose the game of chess being played by the Federal Reserve and its owners. (see Federal Reserve – Conspiracy Or Not? and Federal Reserve vs. Judy Shelton)
The worst possibilities come after something big happens. The Federal Reserve and the U.S. government will work together to stave off any possibility of loss of control. That means that everyone – investors, traders, citizens, communities – will be subject to a host of new economic and monetary regulations, restrictions, executive orders, etc.
It will be like nothing we have seen in the past and beyond anything we can currently comprehend. (also see Bond Investors To The Fed – “Not This Time”)
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
RE: FED POLICY…
“I think instinctively – I can’t prove this, we’re going to learn about this empirically – but it seems to me that the neutral rate is probably higher than it was during the intra-crisis period. And so, rates will be higher.” (Jerome Powell, July 2024)
Powell’s comments were from an interview conducted two months prior to the announcement that the Fed Funds target rate was lowered after more than two years of higher interest rates.
ALL HAIL THE FED!
As investors continue to gobble up stocks and the dollar prices of most assets continue to climb, it would appear that all is well. Concerns about weakening economic activity and recession have been moved to the back burner. Now, the focus is squarely on inflation.
FED CUTS RATES, BUT…
Just a couple of weeks ago, on September 18th, the Fed announced a 50 basis points cut in interest rates. To be clear, the announced cut was generally expected and already discounted in the markets. Most markets had risen substantially over the prior two years in anticipation of a change in direction for interest rates, which had risen sharply and then had remained at higher levels until the recent announcement.
Most investors and analysts appeared to be waiting for the Fed to confirm what was already “known and expected”. Reaction to the official announcement was mostly positive as stock prices continued their upward march and mortgage rates declined.
Bond prices, however, peaked at about the same time the Fed made official its latest gratuitous action. Over the past three days, bond prices have dropped sharply, gapping down at the market open each day. Below is a chart of TLT (20+ Year Treasury Bond ETF)…
Since the Fed announcement, TLT has dropped from a 52-week peak of 101.64 to 95.55 at today’s close. That is a drop of 6% in bond prices at a time when other markets are shouting approval of Fed action and extending recent gains. Why are bond rates rising at the very time the Fed is trying to move interest rates lower?
INFLATION? RECESSION?
A singular possibility is that the bond market sees something other markets don’t; at least, not yet. What is likely troubling to the bond market at this time is the threat of a resurgence of inflation; more correctly, the effects of inflation. Cheaper money and credit now, in the short term, could have serious negative consequences later on. Bigger increases in the CPI and PPI will get everyone’s attention.
A peculiar contradiction to the rise in bond rates is the fact that mortgage rates have declined. In other words, mortgage rates are reflecting what might be expected to happen as a result of the Fed’s efforts to engineer rates lower for now. But, that does not explain why bond rates would move opposite to the Fed’s action and intent.
Finally, the bond market may be ahead of the curve with respect to what comes next. Stock investors seem almost oblivious to the reality of accelerating deterioration in the economy. Stock prices will eventually reflect that reality. (see If The Markets Turn Quickly, How Bad Can Things Get)
Also, the bond market might be telling us that rates need to move higher, and remain at a higher level that is more consistent with historical averages. This could happen in spite of the Fed’s efforts to lower rates, regardless of intention and desire. (also see What Happens After A Rate Cut Is Announced?)
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
WHAT HAPPENS AFTER A RATE CUT?
Has anybody considered what might happen after a rate cut is announced? If the Fed signals a change in direction regarding interest rate policy, as expected by most observers at this point, does that also signal an end to increasing weakness in the economy? Will a recession be averted (officially or not, we are in one) and employers start hiring again? Will people be able to find full-time jobs at satisfactory pay rates; will housing become affordable?
The expectations are there for a cut before the end of the year, probably by September. It is possible that what happens after that might not be consistent with current expectations. In other words, there is a level of deterioration in the economy (liquidity problems, bankruptcies, empty spaces for lease or sale, etc.) that doesn’t suddenly reverse and restore itself.
Most investors and others are so fixated on the potential rate cut that they likely haven’t given much thought to what comes next. That is, assuming that a rate cut is announced. What if the cut doesn’t come as expected or is delayed indefinitely?
MARKETS HAVE PRICED IN THE EXPECTED CUT
The financial markets have risen significantly over the past two years. Stocks have recovered all of their previous losses resulting from the Fed campaign to increase interest rates, and are sporting new all-time highs almost daily. A rush to the exits could occur from disappointment over any further delay in rate cuts. Then, too, the actual announcement of a rate cut might trigger selling anyway, since the cut is already priced in.
There is another problem, too. A goodly portion of lofty stock index valuations are tied to a few extremely large cap tech stocks. That means that the majority of individual stocks don’t share proportionately in the gains of the index. That is Investors should understand clearly that continued financial and economic weakness or a severely deep recession, along with falling stock prices, could occur whether rate cuts are announced or not.
Bond prices reflect the current level of interest rates. Interest rates are set in the bond market. To whatever extent bond traders or investors disagree with attempts by the Fed to raise or lower interest rates, they can bid prices higher or lower, as the case may be. For example, if the effects of inflation were to worsen considerably from this point, investors would demand higher returns to offset further risk from higher inflation. This translates to lower bond prices and higher interest rates, regardless of Fed desires and intentions.
RISKS THAT CAN’T BE IGNORED
The lasting effects from the 2008 Great Recession were such that attempts by the Fed to pursue cheap and easy credit didn’t have the desired impact. It was more convenient and less risky for banks to park the extra money with the Fed than to lend it. During almost the entire decade leading up to Covid, a weakened economy seemed to ignore all attempts by the Fed, whose biggest concern was getting inflation back up to its 2% target. (see The Fed’s 2% Inflation Target is Pointless)
Over the decades, the desired impact of Fed policy continues to fall short of the mark (see Fed Inflation Is Losing It’s Intended Effect). Whatever the Fed’s intentions, and regardless of how logical the reasoning behind its actions and policies, the economy is slower to respond after each succeeding crisis. In addition, financial and economic volatility increases cumulatively.
The Federal Reserve creates bubbles (stocks in the 1920s; bonds 1982-2022; real estate 2000-2007; everything 2020-24) by intentionally expanding the supply of money and CREDIT – the cheap and easy kind. The bubbles always get popped. There again, the Fed is the culprit. In order to contain the collateral damage of their own profligate monetary policy, more intervention of a harsher nature is usually the answer. Notwithstanding the increase in rates over the past two years, the markets have risen as a result of expectations that the Fed will once again fall off the wagon and provide more cheap lubricant for overly optimistic and addicted investors.
When the Fed became concerned about the almost maniacal obsession with stock investing in the 1920s, it started clamping down on the cheap and easy credit that afforded banks the opportunity to lend as much as 90% of a potential investment to their eager and willing customers. The banks were just as eager and willing, too; until it was too late. The economy had begun to weaken many months before the stock market crashed. The Great Depression that followed lasted for more than a decade and was characterized by 20% unemployment, bank failures, trade tariffs, political instability, and world war in Europe.
CONCLUSION
A rate cut is expected and desired by investors, consumers, and others; almost universally so. It is unlikely at this time that markets and the economy will respond with any vigor if/when that announcement is made. It is very likely that big surprises await those who think otherwise. The possibilities include a severe swoon in all markets which have risen in response to that expectation and as a result of any or all of the other factors mentioned in this article. In addition, there is the possibility that rates could be held at this level longer, or even raised, depending on the specifics of future events.
Rate cut or not, what happens after will not be as expected or intended. (also see Interest Rate Cuts – Salvation Or Damnation?)
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
Jerome Powell says “rates will be higher”. I believe him. I don’t think most others do. Investors, especially, need to pay attention.
FED POLICY
I have read the text of Powell’s interview. His comments are consistent with remarks he has made over the past two years during the Fed’s current campaign to see interest rates returned to a higher, more historically normal level…
“I think instinctively – I can’t prove this, we’re going to learn about this empirically – but it seems to me that the neutral rate is probably higher than it was during the intra-crisis period. And so, rates will be higher.”
The anticipation and speculation regarding interest rate cuts is almost comical to watch. Scratch ‘almost’. Interested observers are obsessive about the topic in a hilariously funny way. Mainstream media and the pundits always find cause for promoting a possible rate cut no matter what is said. (see Investors Re: Rate Cuts)
The expectation for at least one cut of 1/4 point before the end of this year seems to be nearly universal, so let’s go with that for now. Here are some questions for consideration.
INVESTORS AND RATE CUTS
When it comes to cuts in interest rates, investors stubbornly cling to the notion that “no” means “yes”. In the movie, Dumb And Dumber, Lloyd Christmas (Jim Carrey) asks the lovely lady he is pursuing what the odds are that the two of them might get together; and, makes a point of telling her to “give it to me straight”. She replies “not good”. She further clarifies that the actual odds are “more like one in a million”. Not to be deterred, Carrey, in character, replies “So you’re telling me there’s a chance”. Here is the clip https://www.youtube.com/shorts/cbrTKw50X6U
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!