If Fed raises rates ‘too often’ (like 2018) – gold could go much higher – AMAC
In recent issues we have pointed out that gold has risen over the last three Fed rate-hike cycles. We can now bring this story to the last year that the Fed hiked rates in 2018 due to market reaction.
Earlier this year I predicted gold would hit $2,200 and Goldman Sachs saw gold go to $2,150. Most often, forecasters’ forecasts were pessimistic. Goldman Sachs also assumes that the Fed will raise interest rates SEVEN TIMES from 0.25% to about 2.0% this year, so they know gold can rise when interest rates rise, but history shows that gold can rise when the Fed hikes rates too much while stocks do to collapse. 2018 saw the Fed’s fourth and final Fed Funds rate hike December 19, 2018, and it quickly sent the stock market down while exaggerating precious metals. Gold rose $35 an ounce (+2.8%) to end the year at $1,281 from $1,246 the day before the December 19 rate hike, while stocks fell.
This could happen again this year if the Fed goes too far in raising rates.
Russia has stored more gold than any other nation since 2010 – Knowing that gold offers “ultimate value” (and anonymity).
In December 1979, Russia invaded Afghanistan amid high and rising inflation, and that act pushed gold from just under $400 to $850 in a month. An untold story of Russia’s invasion of Ukraine last week is that Russia has consistently amassed gold over the past decade – like no other nation – despite being a relatively poor nation, not much richer than Spain. They probably did so as they likely knew that gold would soar after their aggressive actions and offset potential losses on future energy sales.
In 2010, gold made up just 7.4% of Russia’s official foreign exchange reserves. By 2019, that proportion had more than tripled to 23.4%. They funded this by dumping their US dollar holdings.
This gold buying program has put Russia’s gold hoard at number 5 in the world, not far from number 3, behind only the US and Germany. According to the World Gold Council (WGC), Russia currently owns 2,300 tons of gold. At today’s price, that’s about $145 billion, or about 10% of Russia’s GDP. Gold is fungible everywhere. This stash, if sold to a Russia-friendly country like China, could also help offset or negate any monetary sanctions the US or NATO imposed on the country after its invasion of Ukraine — at least in the short term.
Where we are after two months in 2022
All precious metals are in positive territory after just two months into the new year. Up about 5% — and even more after March 1st — the major stock market indices are down an average of 8%, and even more after March 1st. And the indices continued to fall on increasingly fearful news streaming out of Ukraine on Tuesday following President Biden’s State of the Union address.
In the first two months of 2022 US Mint Sales declined (year over year) for American Eagle gold and silver coins – down 21.7% for Gold American Eagles and down 18.4% for Silver American Eagles. This is partly because 2021 was a stellar year of sales growth for the Eagle pattern design change but sales of the American Buffalo one ounce gold coin rose 65.6% in February vs. February 2021, partially offsetting lower Eagle sales.
In the longer term, gold will rise due to rising debt and dollar depreciation
Inflation will come and go. It’s rising now. It will eventually come down again, but the debt will continue to grow and eventually it will either be rejected (by non-payment) or intentionally “depreciated” through a process called “monetization” or printing more money to pay off the debt.
columnist George Will wrote about debt last month, recalling the sad fact that the US had just surpassed $30 trillion in national debt – having surpassed $25 trillion less than two years ago.
It’s almost impossible to imagine such a large number, but in human terms, $30 trillion equates to about $90,000 in debt for every American, or $360,000 for a family of four. Nationally, every 0.25% increase in the fed funds rate means a $75 billion increase in the cost of servicing debt for nothing more than writing checks to big banks, foreigners and wealthy investors holding Treasury bills.
Will explained, “An average rate of just 5% — which Washington paid in 2008 — combined with only modest new federal spending would send the debt skyrocketing 300% of GDP in three decades.” Today’s national debt is 100% of GDP, or 161% when national and local debt are included. And aging baby boomers with fewer younger workers will also bankrupt Social Security and Medicare.
Will concludes: “Even an interest rate of just 3 percent on debt at 250 percent of GDP would siphon off about 40 percent of tax revenue. Inflation amounts to rejection, paying off debt in depreciated dollars, and as the debt increases, so does the government’s incentive to do so Select inflation.” I choose gold!
If you enjoy articles like this, subscribe to the AMAC Daily Newsletter
and download the AMAC News app
Sign up today Download
If you enjoy articles like this, subscribe to the AMAC Daily Newsletter!