The gold market is slightly lower in mid-morning action today as investors await the FOMC meeting decision and press conference this afternoon. This could be the most important Fed meeting in some time. The central bank is expected to announce a faster pace to its monthly security tapering process which could now be finished up as soon as March 2022. The end of the monthly security purchases would then pave the way for the Fed to begin raising interest rates. Despite the Fed’s reluctance to hike rates, it is seemingly left with no choice as inflation is running at the hottest clip in some four decades.
Many analysts are now suggesting the Fed will raise rates several times next year. Expectations seem to range from two to four rate hikes, and any hike in rates is likely to set the stage for a very different investment landscape. As the Fed attempts to normalize policy, it is likely to send stock investors on the run and may bring with it a heightened level of volatility and large amounts of selling. Some have even recently suggested that markets could decline by a whopping 50% as rates rise. Whatever the case may be, it seems as if a wild ride could be in store for financial markets over the next year.
Inflation has been a major topic of concern in financial markets recently and the threat of even higher price pressures may keep investors nervous. Analysts at Saxo Bank recently suggested that inflation could rise some 15% next year if wage inflation spirals out of control. Such a rise would overshadow the major inflation seen in the 1970s and could have a long lasting and significant impact on markets and investors. While a 15% rise in inflation may seem outrageous, it is likely not as far-fetched as it may appear at first glance. The Federal Reserve is already well behind the curve and will likely remain well behind the curve without drastic action.
Many investors assume that higher rates are a negative for the gold market, and while theta may be true
under some circumstances, it does not seem to be the vase currently. If the Fed raises interest rates, real yields are likely to stay quite low. Not only that, but any increases in the Fed Funds rate could have a dramatic, negative effect on global equity markets and would likely fuel safe haven demand for gold. Put simply, it seems as if the gold bulls are in a win/win situation. The winning may just take some time to be seen, but for the patient, long-term investor it will arrive soon enough.
The next several months for gold could be filled with volatility and doubts. Despite any further downside seen, however, the long-term outlook for the market has not changed. Rates could rise several percent before a real opportunity cost is felt , and such a rise is extremely unlikely as it would likely cripple the economy.