By Kelsey Williams for Neptune Global
The big question now is whether the Fed will pivot or not. Some, not a few, already believe that the decision has been made.
Does it really make any difference? We think not.
An assumption of higher prices for gold by some includes the belief that gold prices are influenced by the direction and level of interest rates. For some, there is an implied correlation which suggests that higher interest rates result in lower gold prices.
Historical events, however, refute that claim.
GOLD AND INTEREST RATES 1970-80
Between 1970 and 1980, the price of gold increased from $35.00 oz. to $850.00 oz. But, rather than declining, interest rates were on a tear.
Instead of “struggling to compete” gold was galloping ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments.
The higher rates were a reflection of lower prices for bonds and particularly U.S. Treasury securities. The 10-year U.S. Treasury bond yield exceeded 15%.
GOLD AND INTEREST RATES 2001-11
More recent history provides the contrast.
During the ten-year period 2001-2011, gold’s price increased from $275.00 per ounce to a high of nearly $1900.00 per ounce. And interest rates continued their decades-long decline throughout that entire period.
The lower interest rates continued and approached near-zero levels before the Federal Reserve announced their shift in interest rate policy in March 2022.
BACK TO THE PRESENT
Thus, we have two ten-year periods of outsized gains in the price of gold; and interest rates were doing something exactly opposite during each period.
And, what about now? The gold price fell from over $2000 oz. early last year to a low of $1626 oz. in October, a drop of twenty percent. Now, gold is back over $2000 oz.
There must be another factor that is consistent with both periods above and gold’s long-term increase in price. There is. And, it is the only factor that is reliably consistent over time.
GOLD PRICE AND THE U.S. DOLLAR
The only single factor than can be tied consistently to the long-term increase in the gold price is the loss of purchasing power in the U.S. dollar.
During both of the periods described earlier, the U.S. dollar was the common denominator.
Assumptions that a Fed pivot will bring about higher gold prices need to be clarified.
It is not the change in interest rate policy or the direction of interest rates that is the determining factor. Rather, it is the actual loss in purchasing power of the U.S. dollar that determines what happens to the gold price.
Hence, quantitative easing itself does not necessarily mean a higher gold price. It is further renewed weakness and a resultant loss of purchasing power in the U.S. dollar that will determine the extent of higher prices for gold.
Be that as it may, that renewed weakness and further loss in purchasing power will continue as long as the Federal Reserve continues to expand the supply of money and credit.
Those actions have never been in doubt. Prior to the Fed’s shift to a higher interest rate policy, credit was plentiful and cheap. Now it is more expensive. The world economy, though, still functions on credit. Nay, it is dependent on credit.
Cheap and easy credit is part and parcel of the Fed’s continuous expansion of the supply of money and credit and leads to the loss of purchasing power in the U.S. dollar. That loss of purchasing power is reflected in a higher price for gold.
WHAT IF THE FED DOESN’T PIVOT?
Even if the Fed does not pivot, there is no guarantee that they will be successful in their efforts to return interest rates to a more normal level. In turn, that means they might not be successful in their efforts to lessen the damaging effects of their previous polices and actions over the past century.
In other words, a cheaper U.S. dollar subject to further renewed attacks is still possible with the continuation of a higher interest rate policy. The effects of further loss of purchasing power would show up in a higher gold price.
Since we know that higher interest rates are not a deterrent to higher gold prices, we can safely say that whether the Fed pivots or not, further weakness in the U.S. dollar is a possibility. It is also true that whether the Fed pivots or not, any further loss of purchasing power in the U.S. dollar will show up in the form of higher prices for gold.