Losing Faith in Gold? Perhaps You Shouldn’t.

Losing Faith in Gold? Perhaps You Shouldn’t

Losing Faith in Gold? Perhaps You Shouldn’t.

October 25, 2022 409 view(s)

At one point last week, with gold and silver seemingly plunging to new annual spot low prices, and looking as if they might well be trending down further, I had been beginning to lose faith in my long-held confidence in gold as the ultimate wealth protector.  Then U.S. markets came to their rescue on Friday and they surged back upwards again, restoring my belief – at least in part.  The gold price ended the week back above $1,650 and silver recovered even more in percentage terms ending at north of $19.40 spot. True these prices are still hugely short of their April high points, but they could possibly signify the beginnings of a trend reversal.

Equities surged on Friday as well, which we feel is probably unjustified given the underlying economic situation, which is likely to put a medium to long term strain on business profit margins as inflation continues to remain a problem.  The reasoning behind the optimism is the feeling that the Fed may well start easing off on its aggressive interest rate raising approach after the November FOMC meeting.  Indeed some recent slightly more conciliatory statements from senior Fed officials have fueled this interpretation.  This has been mirrored in the CME’s Fedwatch Tool predictions which have eased marginally in their presumed likelihood of a 75 basis point interest rate rise at the November meeting from near 100% to a marginally lower 95%, but more significantly have now moved in favor of only a 50 basis point rise at the December meeting over a 75 basis point rise by a ratio of 51.8:45.6 at the time of writing.  Previously it had been predicting another 75 basis point rise in December too.

Both gold and silver fell back again in early trade at the start of the current week in Europe, but began to pick up again when North American markets opened, as on Friday.  Equities continued their advance in early US trade. But bitcoin remained pretty much static initially. The Fedwatch Tool moved slightly more in favor of a more aggressive Fed posture, but not significantly so.

According to Martin Murenbeeld’s latest Gold Monitor newsletter, which I rate highly, several Fed officials have noted that at some point in the near future the current aggressive pace of interest rate hikes must slow down. Murenbeeld notes that according to Wall Street Journal Fed reporter Nick Timiraos, as we have noted above Federal Reserve officials are barreling toward another interest-rate rise of 0.75 percentage points at their early November meeting but are likely to debate then whether, and how, to signal plans to approve a smaller increase in December. This news item seems to have helped send gold higher. It certainly appears that some Fed officials are becoming increasingly nervous with the rapid pace of interest rate hikes, and their future impact on the US economy. 

In recent years Fed policy has been ultra-data-dependent – in other words, don’t change policy until after the data signals that you should. That’s how Murenbeeld reckons that the Fed got itself into the current problems it has been facing; it has been unwilling to anticipate that inflation might rise on the back of all the Covid-stimulus, supply interruptions, the Ukraine war, etc. That ultra-data dependency may be changing, in his most recent opinion. 

Murenbeeld reckons that given these assumed mistakes made, some Fed officials might now be more willing to anticipate a slower economy in coming quarters and the possibility of lower inflation beginning to materialize. Monetary policy works, after all, with long and variable lags, a fact which the Fed seems to have neglected in recent years. If he is correct, then some officials could indeed be hesitant to vote for a 75 basis point rate increase even in November, let alone another 75 points in December.

As for gold, silver and equity prices they will probably remain range-bound until November’s FOMC meeting – now less than 2 weeks away, and take their lead from what transpires then.  If the above thoughts are confirmed in subsequent statements and the Fed is seen to be on a less aggressive path ahead – however slight that may be - precious metals at least could be set to take another leg upwards and the dollar to weaken a little.  I would remain wary with regard to equities as the overall economic picture does not look to be strengthening and although inflation may be peaking by the year end it will likely still remain higher than is economically desirable.  The US economy is certainly not out of the woods yet.


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About the Author: Lawrence (Lawrie) Williams


Lawrence (Lawrie) Williams has been involved in the mining sector and precious metals for over 60 years. He worked as a mining engineer and analyst in Africa and North America and wrote for the Mining Journal, and subsequently managed the publishing company, for over 38 years - including 13 years as CEO. Williams shares his unique knowledge of the precious metals industry at Wholesale Coins Direct and other outlets.