Fear of Rate Hikes a Greater Threat than Actual Hikes

The Onset of Fed Tightening Usually Sparks Major Precious Metals Gains

Mike Gleason Mike Gleason
Interview with: Mike Gleason
January 7th, 2022 Comments

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Precious metals markets are ringing in the New Year on a bit of a down note. Despite seeing some strength in late December, gold and silver prices retreated in the first few trading days of 2022.

As of this Friday recording, gold is down 2.2% for the week to trade at $1,793 per ounce. It seems that every time the yellow metal breaks above the $1,800 level and raises hopes for a rally, prices get pulled back down into the trading range that has been in force since last summer.

Turning to the white metals, silver shows a weekly loss of 5.2% to come in at $22.12 an ounce. Platinum is off 1.4% to trade at $960. And finally, palladium prices are dipping by a slight 0.2% this week to check in at $1,929 per ounce.

Metals markets didn’t get any help from the Federal Reserve. On Wednesday, the FOMC released the minutes from its most recent policy meeting. The Fed struck what was widely interpreted as a hawkish tone.

Policymakers expressed concern over a tight jobs market and persistent inflation pressures in the economy. As a result, the central bank may accelerate its planned reduction of bond purchases and raise interest rates sooner than previously expected.

Fed funds futures now point to a 70% probability that Jerome Powell and company will raise interest rates in March.

The question for investors is whether now is the time to bail out of positions and avoid the risks of holding assets that are vulnerable to rate hikes. The possibility of heightened market volatility ahead of the Fed’s big decision does loom.

However, it’s likely that fears of rate hikes are more of a threat than rate hikes themselves. This is especially true when it comes to gold and silver markets.

Many investors wrongly assume that rising interest rates are bad for gold. But history shows that the early stages of a Fed tightening campaign can actually be opportune times for rallies to commence.

George Milling-Stanley of State Street Global Advisors made this point in a recent interview.

George Milling-Stanley: I think historically, gold's response to the Fed is pretty clear. When we are anticipating rate hikes at some indeterminate point in the future, gold gets very nervous and often is rather weak. And that's what we've been seeing ever since we started to see these high inflation numbers in the middle of last year. And I think we'll continue to see that until the Fed actually acts. But historically, whenever the Fed has actually started to raise rates, then the gold market decides that this is what we expected all along. It's probably less than we had feared, and therefore that the gold price tends to recover. I've said this to you before… the last time the Fed was in a serious tightening mode was the three years between December 2015 and December 2018, (we saw) nine rate hikes, gold (went) up 21%. Before that, in the three years from 2004 to 2006, 17 rate hikes, gold up 70%.

State Street maintains a bullish outlook for gold in 2022.

But in the near term, precious metals markets are likely to continue to be weighed down by uncertainties over monetary policies. The sooner the Fed finally acts, the sooner gold and silver may be cleared for takeoff.

In the meantime, this winter is shaping up to be a favorable period for accumulating physical bullion at bargain prices.

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Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

Mike Gleason

About the Author:

Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.