Over the past few weeks and months the gold price has seen several rallies taking it back above the $1,800 level. Each time, to date, it has been unable to hold on to this price improvement. Likewise, silver has hovered above and below the $23 level and yet again brought down a fraction below this at the close of last week’s trading.
However both started the current week in positive territory in European trade. It remains to be seen whether this positive note will transfer to the North American markets as the week progresses.
Gold moved back above what is turning out to be the key $1,800 price parameter about a week ago, and so far has held on to most of its gains. It remains to be seen if this price will hold, especially in light of the increasing likelihood that seemingly ever-rising inflation will force the Fed’s hand in terms of raising interest rates more aggressively than it had previously indicated. This would be an attempt to try and bring the inflation dragon under some semblance of control, although such a solution may well prove to be too little too late.
There are several key economic indicators that may move on Fed tightening cycles this year. It is well worth examining, though, what has happened to some of these indicators in past such attempts by the Fed to exert controls of this type. The indicators I will look at specifically are the strength of the dollar index, the movement in the S&P 500 equity index and the gold price. All of these can have an effect on the strength of the US economy and the public’s perception thereof.
The reactions to the Fed’s past periods of tightening, which have mostly tended to be pretty short lived, have often been counterintuitive in the longer term from the implementation of a period of generally higher domestic interest rates. During the past five attempts by the Fed to tighten monetary policy, for example, this has led to a somewhat mixed performance by US equity markets, as represented by the S&P 500 index, and an average weakening of the US dollar, together with a subsequent rise in the average gold price.
There is certainly a worry after what many see as an unsustainable boom in equity prices. Additional uncertainty abounds because of the coronavirus situation.
Any such deterioration in equity price indexes would be a visible change that could result. And, if it happens, there could well be a decision by the Fed to reverse its tightening measures after only a relatively short space of time, as has seen to be the case in the past.
The Fed has, to date, been somewhat diffident in undertaking any policy that might be seen to depress the most visible signs of US economic growth. It may thus be able to live with a more cautious approach to rising interest rates than many economists and media commentators have suggested.
After all, the US central bank has lived with a prolonged period of well-below target inflation and may be prepared to accept a more cautious approach to rising interest rates in the interests of bringing the average up – at least for a few more months yet. Any drastic moves on interest rates could well see a major headwind for the Fed in meeting its unemployment rate and economic growth targets.
Even if the Fed speeds up its interest-rate raising decisions, any increases are unlikely to lift real rates into positive territory – at least for 2-3 years – given the current strength of inflation. Many see it continuing to rise in the short-to-medium term. This would mean real interest rates remaining in negative territory for some time yet. Negative real rates have almost always been positive for the gold price.
If, however, there is a more aggressive approach to interest rate increases, equity prices could well fall as a consequence, which could lead to gold price strength.
Gold has a long history, dating back thousands of years, as a way to help protect against the inflationary impacts on currency buying power. The same can be said of silver, which would also likely benefit as its price still seems to move pari-passu with gold, even though its main markets these days tend to be in the industrial sector. As they almost always have, gold and silver would thus continue to act as wealth protectors in uncertain economic times.
by Lawrence Williams
Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.