When The Fed Is between a Rock And a Hard Place, Got Gold?
The comments below are an edited and abridged synopsis of an article by Rick Mills
In two years’ time, will we look at a chart of the Fed cutting rates in response to recessions or crisis and see the line rising, reflecting higher interest rates powering the US economy out of the covid recession? Seems unlikely.
With 7% US inflation climbing fast, the Fed has few policy options at its disposal. The horrendous yields on US Treasuries make them a poor investment, something foreign investors have already realized, and US bond-buyers will cotton on soon.
This practically guarantees the continuation of Fed bond buying (QE) despite the much-ballyhooed taper. As for raising rates, the Fed can’t do it, at least not at the levels required to beat 4% inflation (that number may be charitable). We are talking about interest costs nearing a trillion dollars per year when the deficit is accounted for.
Peter Schiff maintains that the government is using cooked CPI data that understates inflation. If it was using the formula it used in 1982, inflation would be higher in 2021 than it was then, he writes, or just over 15%.
Nobody is going to buy US debt at 7% inflation, let alone 15%. The Fed will continue to print money, buy bonds and keep interest rates below 1% for as long as it can—probably hoping that inflation will magically go away—all of which is positive for gold.
Rising geopolitical tensions add to gold’s allure. There are several hot spots in the world today that could easily flare up into war.
They include North and South Korea; China and Taiwan; and a crisis in Belarus that Ukrainian officials believe is a ruse invented by Russia to stage an invasion of Ukraine, similar to when Russian forces annexed Crimea.
There are 100,000 Russian troops on Ukraine’s border and photos were recently released showing its forces on the move. An alleged Russian cyberattack hit around 70 internet sites including the security and defense council, Reuters reported. Talks between Moscow and Western allies ended with no breakthrough.
When market participants see Fed rate increases as the hollow threats they are amid rising and currency-debasing inflation, we expect many will see the light and turn to gold.