Get Ready for Lower Interest Rates as Fed Loses Its Nerve
The comments below are an edited and abridged synopsis of an article by Mike Gleason
As the Federal Reserve signals an impending rate cut, the gold market is on the brink of setting a record. Last Thursday, gold surged past the $2,400 level, trading just $25 below its all-time high. As of last Friday, spot gold prices stood at $2,423 an ounce, marking a 0.9% increase for the week.
In the white metals market, silver experienced midweek gains but has since retracted, showing a weekly loss of 0.9% to trade at $31.13 an ounce. Platinum has dipped 2.8%, trading at $1,011, while palladium has fallen 5.3% to $1,008 per ounce.
A noticeable divergence occurred in metals markets. The platinum group metals and copper declined, whereas monetary metals and mining stocks saw gains. Meanwhile, equity investors offloaded shares of high-performing market leaders, such as Nvidia, resulting in a 2% drop in the tech-heavy Nasdaq.
Investors are concerned that recent signs of a weakening job market and softening manufacturing activity could signal trouble for economically sensitive sectors. However, Wall Street optimists often view bad economic news as good for markets, anticipating that it will prompt the Federal Reserve to cut interest rates.
Comments from Fed Chairman Jay Powell and other central bank policymakers this week suggest a rate cut could happen in September. Central bankers were encouraged by Thursday’s Consumer Price Index (CPI) report, which showed inflation easing in June, with the CPI coming in at an annual rate of 3%, down from 3.3% the previous month.
While this is a significant improvement, it is still far from the Fed’s target of 2%. Nonetheless, Chairman Powell indicated that he doesn’t need to see the 2% target hit before cutting rates; he just needs to see progress toward the objective and project that progress into the future.
Whether inflation, as the government calculates it, will actually sustain at 2% is uncertain. Powell’s confidence in his projections does not guarantee accuracy, as the Fed has a history of misjudging economic forecasts.
Central planners often believe they know more than the market and that their interventions can produce better economic outcomes. However, the reality is that even the most brilliant economists cannot precisely predict future inflation rates or the timing of the next recession or financial crisis.
By setting short-term rates for the entire economy, the Federal Reserve has prevented market forces from balancing all the factors it supposedly weighs, along with others that central planners may overlook. Consequently, market resources have been misdirected from responding to real economic factors to reacting to central bank policies.
Predicting the Fed’s next move has become a major focus on Wall Street. Investors who hold gold and silver often do so because they distrust the Fed and doubt its ability to forecast the future or genuinely pursue price stability.
Precious metals investors are typically humble enough to acknowledge their uncertainty about the future. This is why they maintain core positions in bullion regardless of market conditions. Although often labeled as “doom and gloomers” by Wall Street optimists, many hard money holders also own financial assets but prefer not to be entirely exposed to the financial system’s risks.
Some gold and silver owners are also bullish on the stock market but are aware that a bullish trend can be disrupted by unforeseen events. To be financially resilient in uncertain times, investors should diversify their portfolios, including holding physical precious metals outside the banking system.