Once again, the financial press and gold trading markets are full of discussions about the FOMC and the issue of potential rate increases. However, both the tone and the substance of these discussions have shifted substantially over the past two to three years.
Mixed Indicators and Negative Interest Rates
It is worth noting that the predecessor to Fed Chair Janet Yellen, Ben Bernanke, has been talking about the central bank rate recently. He broached the issue of potential negative interest rates, even while Yellen is trying to pretend that the December rate hike was not a mistake amidst mixed market indicators.
For those who buy gold and silver and invest in precious metals, the interest rate topic is only one of a complex set of factors that are monitored to evaluate potential price movements. Historically, the greater the interest one can gain from “riskless” investments like government bonds, the more downward pressure on those assets that don’t generate current income.
Fed Crying Wolf Again?
Thus, after nearly a decade of virtually non-existent interest rates, the FOMC moved in Q416 to finally take action and implemented a ¼ point rate increase. It also indicated quarterly increases for 2016. However, the Fed spent more than two years threatening to raise rates in an attempt to use its power to talk-down long-term rates, and its conflicting messages has significantly damaged its credibility.
Moreover, recent signals are that the planned multiple increases for 2016 are now on hold as economic reports and conditions continue to raise concerns in the U.S. and globally. As recently as April, Yellen was affirming plans to raise rates, but she gave a talk in early June that seemed to counter those indications.
She did not actually address the issue. Rather, speaking at the World Affairs Council, she resorted to more ambiguous statements, such as, “While the May jobs report is concerning, I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.” 1
Understanding the U.S. Economy Is Not in a Vacuum
This equivocation from the Fed is just one of the factors concerning gold traders. The United States economy is, of course, significantly impacted by those of Europe and China, and concerns there are already driving more worries about negative interest rates.
This market reality is now being studied carefully. In fact, the World Gold Council has been particularly aggressive on the issue, recommending that gold investors increase their holding by as much as 2.5 times, even under conservative projections concerning gold prices.
Despite the supposedly soothing words from many politicians and central banks, a statement from the WGC says it best, “We have entered a new and unprecedented phase in monetary policy.” Governments simply have few tools in their kit to deal with the continued global economic malaise, and fiat/paper currencies are at greater risk of losing significant purchasing power than in many decades.