Most gold investors will be happy to leave 2021 behind. The year, despite seeing some blips of upside, was marked primarily by gold lacking any significant follow through. This kept the metal mostly under wraps despite a red hot commodity market. The main reason for a lack of follow through could likely be attributed to worries over the Fed raising interest rates and putting a halt to its monthly security buying.
The Fed in recent weeks announced that it would begin to taper its monthly security purchases, or QE, designed to keep rates low. The Fed Chairman has since suggested that the central bank may need to taper faster than originally anticipated, and some analysts are now looking for the Fed to begin hiking interest rates sooner than previously thought.
Have the recent Fed actions and commentary caused the floor to fall out underneath the gold market? No. Have they driven some volatility in the market? Sure. Will the Fed continue to be a source of selling and heightened volatility within the gold market? That remains unclear. In fact, Fed actions could have the opposite effect of what many think.
Even if the Fed does follow up its security purchase tapering with some rate hikes, would that have a dramatic impact on real rates? Probably not. If the Fed, as some believe, tries to hike rates multiple times-say three or four hikes-could that mean the central bank is becoming too aggressive? Absolutely. The question investors ought to be asking themselves now is how high rates could reasonably go, not if the Fed will begin to tighten them.
The Fed has already stepped in dung, insisting that the period of inflation was transitory in nature. Chairman Jerome Powell recently alluded to the Fed’s missteps, and suggested that the term transitory be “retired.” The Fed now seems to realize and acknowledge the fight it is facing. Inflation is likely here to stay, and with the Fed already well behind the curve may be more difficult to fight than ever before. The central bank now finds itself backed into a big corner, and it may lose credibility whether it tightens policy or not. The Fed’s lack of action in recent months, even years, could be the key to higher gold in the years ahead.
If the central bank maintains the current status quo and maintains a very accommodating level for rates, inflation could run very far out of control. This could keep investors eyeing the gold market and could keep the yellow metal moving higher over time. If the Fed decides to aggressively raise rates, it is likely to upset equity investors and fuel significant selling and volatility
across risk assets. This may also prove to be bullish for gold over the long run .
For the time being, gold is likely to maintain its recent trading range until a stimulus comes along that causes significant change. That stimulus may come in the form of aggressive Fed action or a lack thereof.