Last Friday’s $50/ounce drop in the Dollar gold price was a nasty surprise; it seemed to come from nowhere. In fact, it was a blunt reminder of the power that the US central bank, the Federal Reserve, can indirectly exercise over the gold price.
It was a packed week but most of the big news events were widely anticipated. On Wednesday, the Fed put up its benchmark interest rate by 0.25% to a range of 4.5%-4.75% – as generally expected. On Thursday, the US Bureau of Labor published data showing that the economy added 517,000 jobs in January, double that recorded in December. This wrong-footed most economists, who had expected around 185,000 new job openings. The US unemployment rate fell to 3.4%, the lowest since 1969. Job openings also rose in January, to 11 million, and unemployment claims are at their lowest in nine months.
These figures proved a series of grenades in financial markets. They have blown off-course the route the Fed seemed to be following, an amble towards peak interest rates of some 5% by the end of 2023.
Some economists conclude that slower wage growth and lower unemployment is providing a “utopian scenario” in which consumer demand stays strong while inflation is quashed. But it’s just as likely that, amid the deep uncertainty that policymakers have as to what’s going on in the US economy, that they will make a misstep and land themselves with a dystopian scenario.
The January jobs report suggests that the US economy is still firing on all cylinders despite the Fed making money and credit more expensive than for years. One of the tasks the Fed has is to bring about stable prices; to that end it has raised interest rates eight times since March 2022 in the fight against inflation that reached a four decade high of more than 9%; rates are now their highest since October 2007. Higher rates generally mean a stronger Dollar and a weaker gold price in Dollar terms; on Friday, the Dollar rose by almost 2%, while gold plunged. ‘Stable prices’ mean that inflation is tamed; the US consumer price index (CPI) in December was an annualized 6.5%, its lowest in a year but still way ahead of the Fed’s target of 2%.
The gold price reacted so badly to the jobs report not because gold needs greater unemployment, but because of a fear that the Fed will push interest rates higher than expected, making the Dollar even stronger, and leaving gold (which pays no interest) relatively unattractive. The temptation for the Fed is that it misinterprets the data, concludes that the economy is motoring and that inflation remains a threat, so hikes rates even higher. Fed policymakers seem split on this, some pushing for higher rates (to finally extinguish inflation) and some for an easing of rate increases (for fear of putting the economy into a serious recession with all the associated miseries). For some commentators it’s ‘high noon’ for central bankers – halt interest rate rises too late and deepen this year’s economic slowdown, or too soon, leaving inflation alive if not exactly kicking.
Stagflation for some
If the US path to monetary stability is unclear at least the Fed has a clear choice. The same isn’t true in the UK or the Eurozone.
The International Monetary Fund (IMF) came in for a tornado of criticism from some British politicians last week for its gloomy assessment of the British economy, which it said would shrink by 0.6% this year, placing the UK below both the G7 group of richer nations and, humiliatingly, Russia. The IMF said the UK economy would grow by 0.9% in 2024 but the Bank of England (BoE) forecast for that year a further decline, of 0.25%. The Eurozone’s gross domestic product (GDP), which managed a 0.1% increase in the final quarter of 2023, would grow 0.7% this year and 1.6% in 2024 said the IMF. Last week, the BoE pushed interest rates to 4%, a 14 year high, while the European Central Bank (ECB) also put rates up, to 2%. Raising interest rates in the face of a slowing economy is unusual, to say the least.
Forecasts for how economies will perform often turn out to be wrong; the further ahead they look, the more likely they will go astray. At this point the most any crystal-ball gazer (i.e. all economists) who cares about their reputation would be likely to say is that all the IMF forecasts are well within a margin of error.
The rocks ahead for the UK are huge. Public sector workers – teachers, health workers, fire personnel – are being joined by many others in strike action to demand wage increases that keep step with inflation. Trades unions lack the muscle they once had, but their strikes still cost at least £1.7 billion in eight months last year, according to the consultancy the Centre for Economics European gas storage levels and Business Research (CEBR). There are no signs that the government is prepared to budge on its (sub-inflation) wage offers. For Eurozone members the big fear early in 2022 – that energy costs would soar as a result of the Russia/Ukraine war – has so far not materialised, thanks to a mild winter so far. Energy costs are lower than expected, easing the cost-of-living fear.
Yet none of these three are out of the woods. The growth forecasts from the IMF are chimerical. It takes months for higher interest rates to filter through to the ‘real’ economy, so the Fed could easily overstep the mark and squeeze interest rates so tightly that a recession will result in late 2023. The US also has the matter of its troublesome debt ceiling (of $31.4 trillion) to negotiate before June. As for Britain, the strikes are a troubling nuisance but one can sympathise with workers whose living standards have fallen far behind inflation. The Eurozone may have escaped high energy bills this year, but next may be another matter.
And then there’s Ukraine, an apparently bottomless pit into which money is being poured by the West, which now just a couple of steps away from a direct military confrontation with Russia. Tanks are headed for Ukraine. What next – fighter jets? Such a fight would not only be devastating in human terms; it would be ruinous of paper currencies. One can see from the example of Lebanon – which has just devalued its currency, the Lebanese Pound, by 90% – what social and political catastrophe can do to a fiat currency, and what human heartache results. Which is why our motto is Gold is security: Glint its key.
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.