Consensus has it: this week’s Federal Open Market Committee (FOMC) meeting will be ushering in another 25-basis-point rate hike for the U.S. At this point, this is no surprise. But some gold watchers think there could be an opportunity here with gold prices.
All Eyes on the Federal Reserve
In March, we wrote about a recent fascinating trend in gold prices versus interest rate policy. Research had been released showing that in the last few years, the relationship between the two seems to have shifted, at least temporarily.
Take March 2017, for example. The Fed raised rates by 0.25%. Gold prices went higher in the next couple of months.
In fact, after all three of the last interest rate hikes, gold prices went higher in the months following. There are several reasons why, but the most notable is easy to understand.
Some experts believe that expectations for rate hikes have recently been “baked into” gold prices long before they happen. This clear advance warning can depress gold prices temporarily before the final policy announcement.
Then, when it comes, the relief of the announcement is sometimes interpreted as good news that provides upward pressure for gold prices afterward.
While it is impossible to predict gold price movements over short-term time periods, many experts point out that gold and silver could well have more potential upside ahead than the overheated stock market and overinflated housing market.
We’ll be watching this week to see if this interesting trend history is repeated after the Federal Reserve Meeting.
AN ECONOMY ON THE VERGE OF A SLIDE?
There’s another reason gold has been more resistant then usual to rate hikes this year. The Federal Reserve seems to be signaling that it won’t be able to keep up the pace of interest rate increases it had promised in 2017.
The economy has been showing every sign of slowing gradually. In May, the U.S. economy added only 138,000 jobs, well below the 180,000 hoped for by economists. This anemic job growth surprised the markets.
This week’s release ofMay’s Producer Price Index and Consumer Price Index will reveal more information about the real rate of inflation.
Experts have a lot to say about this week:
MKS (Switzerland) SA head Afshin Nabavi is bullish on precious metals and views any pullbacks as potential buying opportunities.
Adam Button, currency analyst with Forexlive, sees strength in gold due to an expectation that Fed Chair Janet Yellen may be considering pausing rate hikes until signs of inflation emerge.
RJO Futures and Options senior commodities broker Daniel Pavilonis thinks any dips in gold heading into the Fed interest-rate decision could be short-lived and the gold market will head higher.
CMC Markets senior market analyst Colin Cieszynski remains bullish on bullion and views any drop as a buying opportunity.
DailyFX senior currency strategist Christopher Vecchio thinks the Fed will have to throttle back interest-rate expectations as wage growth and inflation remain muted. He adds that a recent spate of mediocre economic data does not support a third Fed rate hike this year.
DAVID STOCKMAN WARNING: MARKET CORRECTION AHEAD
David Stockman, former director of Office of Management and Budget under President Reagan, has been sounding an alarm.
According to Stockman, this period could well be the calm before a terrible storm, driven by dashed expectations for economic windfall under the new president.
Stockman contends that the new administration’s promised tax reform and infrastructure packages can never become a reality in this toxic environment. This could potentially erase a huge hoped-for benefit for Wall Street as well.
Stockman fears the S&P 500 could possibly fall to levels as low as 1,600, about a 34% drop from current levels. According to Stockman, there is nothing rational about this stock market at its current sky-high valuation.
Euro Pacific Capital CEO Peter Schiff agrees. He cautions the “Trump rally” in stocks is not on firm footing at all. Schiff urges investors to consider gold.
A DECISION TO THINK AHEAD
Hope for the best, but prepare for the worst.
Ultimately, this week’s FOMC meeting will soon just be one more footnote in 2017’s market record. Over the course of the next few years, however, many experts believe the long-term prospects for gold remain extremely favorable compared to many other financial assets.
Stock market valuations are priced to perfection and political paralysis in Washington, D.C. is unprecedented. The ambitious Republican agenda on health care reform, tax reform and infrastructure spending is stalled while fear and confusion have gripped the nation.
Gold is a safe haven asset that can help you and your family survive and thrive in periods of social, political and economic upheaval.
If you do not own any physical precious metals in your retirement portfolio, you are frankly not ready for the next political or geopolitical crisis.
See also: Federal Reserve Under Fire