There has been much discussion in recent weeks about the Fed and its plans for higher interest rates. The Fed has already raised the Fed Funds Rate a few times, including a surprise 75-basis point hike done last week. The central bank appears to want to show the world it means business, and will stop at nothing to get inflation under control. Using all of the tools at its disposal, however, does come with a price. Stocks investors may become even more agitated in the months ahead as rates rise further. The Fed could then find itself facing increasing public and political pressure to keep stock investors and markets appeased. Needless to say, markets and investors like lower rates. As the Fed hikes rates even further, lower equity markets may cause the Fed to think twice.
The Fed is likely to hike rates two or three more times this year. As the end of the year approaches, however, the Fed may already have seen significant downturns in equities and risk assets. This could lead it to not only stop raising interest rates, but even to reverse course and strat lowering them at the beginning of 2023. The major Fed reversal could spur the next major bull rally in gold and metals and could quickly send the yellow metal back to all-time highs and beyond.
Higher rates are not only bad for the economy, but may also boost the dollar. The U.S. currency has been moving higher in recent months and could become increasingly problematic if its rise continues. Not only does a stronger dollar affect the U.S.’s ability to manage its debt, it also affects other debt all over the world that is denominated in dollars. The stronger dollar is a problem for the world and the global economy. One of the simplest ways to let some air out of it is to start lowering rates.
The fight against inflation will almost certainly be far from over when the Fed pivots. Not having the ability to raise rates to double digits as it did during the Volcker era in the 1980s, the Fed may simply decide to give up the fight. As it does, the U.S. could find itself in for an extended period of stagflation. This economic condition is defined as high prices with dwindling employment and demand. The economy could, in other words, find itself stuck in a poor position for months or even years. Such a scenario could also be positive for gold, as it could increase investor demand for alternative asset classes.
The gold market for now remains stuck in neutral. The market has seemingly hugged the $1850 level in recent weeks. The $1800 and $1900 levels are the keys and could signify a breakout or breakdown if a close is produced above or below. Against the current economic and geopolitical backdrop, the smart money may be more inclined to bet long than short. Prices could rise, therefore, in the months ahead.