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Category: Bullion Bulletin

Bullion Bulletin: The receding pivot

Those hoping for the arrival of the long-discussed Fed 'pivot' (a reversal of the US central bank, the Federal Reserve's, policy of ever-higher intere...

8 January 2023

Gary Mead

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Those hoping for the arrival of the long-discussed Fed ‘pivot’ (a reversal of the US central bank, the Federal Reserve’s, policy of ever-higher interest rates) will be disappointed, following publication of the minutes of December’s Federal Reserve policy meeting.

In the past, higher interest rates have tended to depress demand for gold (and hence lower its Dollar price) as gold bears no interest. Thus the outlook for 2023 of further Fed interest rate rises, if past precedent was followed, ought to weigh on the Dollar gold price. And yet, and yet…

Confronted by inflation rates rocketing to a 40-year high last year, the Fed has determined to cool the US economy; in 2022, it thus raised benchmark lending rates seven times, taking them to 4.25%-4.50%, the highest since 2007. Given that the labour market is still running hot – 1 .7 jobs were available for every unemployed person in October – the Fed’s policymakers still fear inflation more than recession.

The minutes reveal that Fed policymakers believe “a restrictive policy stance would need to be maintained” until clearer and more decisive evidence that inflation is on a sustained downward path. None of the participants in the meeting thought it appropriate to begin reducing the federal funds rate target in 2023. The Federal Reserve expects higher interest rates to remain in place for “some time”, as it continues to see inflation as the major threat to the American economy, despite increasing fears over a potential recession.

US consumer prices rose at an annualized rate of 7.1% in November, the lowest in 15 months and against what may be the peak, of 9.1%, in June. The next consumer price index figure, for December, will be published on 12 January. However, even though inflation is slowing in the US it is still currently more than three-and-a-high times higher than the Fed’s ‘target’ of 2%/year. The ‘terminal’ rate – the point at which the rate will come to rest before the Fed starts reducing rates – is now expected to settle some time in 2023 at around 5%.

And yet after the minutes were published gold reached its highest in seven months; investors seem eager to sniff even the faintest scent of a ‘terminal’ point. Back in March 2020 the federal funds rate was 0%-0.25%; 2022 was the year when the Fed started raising interest rates and US Treasury Bills became relatively more attractive for investors. Even as the fed funds rate climbed in 2022 the Dollar gold price kept its head up – over the year it made a modest gain of 1.6%.

If the Fed continues to tighten monetary policy too far the risk is that a recession will happen. High levels of government debt – $31.5 trillion in the US for example – means that higher interest rates are as painful for governments as mortgage-holders. US interest payments last year were probably around $399 billion and could triple over the coming decade. Even at the historically low 4.50%, the US is forced to pay money that could be much more useful elsewhere. A commodity analyst at UBS reckons that “it’s too early to call for a Fed pivot… it’s not yet time to buy gold… in 2023 there will be a period where it’s interesting to buy gold when the market starts to smell that the Fed will cut interest rates”.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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