Itching to go
It's not the Middle East and it's certainly not Ukraine. It's whispers about the future policy direction for US interest rates. All it took to drive the Dollar price of gold to a new record high were a few words from Christopher J. Waller, one of the more tough-minded members of the US Federal Reserve board of governors to the American Enterprise Institute think-tank, to ignite the tinder pile under gold. Waller signaled that interest rates were unlikely to rise further, and could even start to be cut, if inflation continued to slow. In October the US inflation rate dropped to 3.2%, compared with 3.7% in September and more than 9% a year ago. Consumer spending is slowing, unemployment has crept up to 3.9%, manufacturing surveys are weakening. Growth is slowing too; Waller said he expects US gross domestic product (GDP) in the final quarter of this year to be 1%-2% against almost 5% between June and September. Most bits of data suggest the US economy is coming off the boil and that the much-desired 'soft landing' is ahead. Jason Furman, former economic adviser to President Obama, said on social media last week "we're almost at the soft landing."
Not all the Fed's governors are so sanguine however - Waller's colleague at the Fed, MIchelle Bowman, said that further interest rate rises may be needed to bring inflation back to the Fed's inflation target of 2%/year. But the markets are more inclined to Waller than Bowman; according to the CME's 'FedWatch' tool the markets now have 100% certainty that at its next policy meeting (this month) the Fed will not raise interest rates, currently 5.25-5.5%. And after so much uncertainty it's difficult to say interest rates have stabilized and might start to decline. After all, in this rate cycle this is the seventh time investors have thought the Fed might be turning softer. Jamie Dimon, CEO of JPMorgan Chase, is another voice who thinks the inflation fight may not be over. "Governments have the biggest deficits ever, and they have the biggest debt ever" he said. The US has had "drugs injected directly into our system called fiscal stimulation, the largest we've ever had in peacetime." The funding of the green economy and greater militarization will require more money; funding those will be inflationary, warned Dimon.
Inflation rates in the US and Eurozone
It's been a good year
Gold was itching to start its bull run. It's been a good year for gold. If hints of interest rate cuts are good for gold - think weaker Dollar, lower yields for competing investments - then the obverse ought to be true - that rising/high interest rates should be bad. Yet that has not been the case in 2023. Counteracting those interest rate rises have been a handful of gold-supportive indicators - the rumors that the BRICS group (Brazil, Russia, India, China and South Africa) were preparing an alternative reserve currency to the Dollar, the continued strong demand for gold from central banks (800 tonnes bought in the first nine months of the year against 1,100 tonnes in the whole of 2022), the uncertainty as to what money is or might become (partly fueled by the apparently unstoppable move towards Central Bank Digital Currencies or CBDCs), and the steady erosion of the purchasing power of fiat money as a result of inflation, have all kept gold on edge in 2023, just waiting to spring higher. The apparent promise of peak interest rates was merely the trigger; since the start of this year the Dollar price of gold has risen by more than 12%.
2024 may be even better
Elections on both sides of the Atlantic are already starting to dominate the headlines. A bitter clash between presidential hopefuls in the US; the probable end to some 13 years of Conservative government in the US; parliamentary elections in the European Union; all will take place against a backdrop of deep economic uncertainty, with fiscal deficits pressing and sovereign debts in advanced economies close to their historic highs. The International Monetary Fund (IMF) forecasts ratios of debt to GDP in 2024 at close to 100% in the UK, France and the US, 133% in Italy and 156% in Japan. During the Great Moderation, with interest rates far lower than they are today, those ratios were less than 50% in the UK France and the US, 100% in Italy and 75% in Japan. The IMF also forecasts real (i.e. inflation-adjusted) anemic economic growth for 2024-28, averaging 1.9% in the US, 1.6% in the UK and France. 0.9% for Italy and 0.6% for Japan. The solution for all the extra spending burdens that are going to face governments over the next few years, ranging from building up their military capacity to financing the green economy, is higher economic growth. But that isn't going to happen. They can either force voters to lower their expectations, or try to borrow even more, or create more money out of thin air.
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.