Gold hit a new all-time high Tuesday after Jerome Powell gave some indications that the Federal Reserve is getting closer to actually cutting rates.
In this episode of the Money Metals' Midweek Memo, host Mike Maharrey analyzes the record-breaking rally, and puts Powell's comments and rate cut mania into context. He also touches on market reaction to the Trump assassination attempt.
"And Jerome Powell spoketh, saying, 'Saying, let there be light!' And there was light. And it was good. And then gold rocketed to an all-time high."
Mike noted there was already some momentum before Powell spoke at the Economic Club of Washington. The price of gold was already driving upward on Monday morning with some safe haven buying in the wake of Sunday’s attempt to assassinate Donald Trump.
"I think the lesson from the crazy events on Sunday is just how tenuous the world has become. I mean, did you have Trump getting shot at on your July bingo card? Things can change on a dime and you really have to be ready for anything."
Mike pointed out that most investors view gold as a safe haven asset.
"The thing is most people buy their gold after the turmoil has started. It’s a little like trying to buy fire insurance when your house is burning."
In an article published by Money Metals, Brien Lundin said he didn't think the assination attempt itself had much impact on the gold market. As he pointed out, gold was actually down in overnight trading after the shooting. So, what drove that little rally on Monday?
"Gold began to rise later in the morning as mainstream financial news sources speculated about the implications of a Trump presidency, which now seems all but assured. They noted that Trump would likely fire Powell in favor of someone more politically malleable and amenable to easier monetary policy.
"So, gold took off."
Mike called this "pretty solid analysis" and gave an overview of Trump's criticism of Powell when the Fed was trying to normalize rates in 2018.
Mike said the ironic thing is Powell isn't exactly a tight monetary policy hawk.
"We’re about to get rate cuts again. And as I’ve been saying for months, the inflation dragon isn’t dead. It’s just playing possum. And now we’re on the cusp of even more inflation. This is why gold hit a record Tuesday."
So, what did Powell say?
He hinted that interest rate cuts are probably on the table in September. At least that's how markets interpreted it. Interest rate futures now assign 65 percent odds of a funds rate of 4.5 to 4.75 percent or below by year-end. That would be a 75 basis point cut.
Mike reiterated that inflation isn't exactly on the run, pointing out that producer prices heated up in June. Rising production costs often serve as a leading indicator of consumer price inflation coming down the pike.
"But that’s neither here nor there. The Fed is desperate to cut and the markets are desperate for the easy money to start flowing again. The problem is it’s too late. The economy is sliding into the gutter. I’ve been saying for a while this was going to happen. The economy is addicted to easy money. The Fed took it away. Addicts don’t do well without their drugs."
But Powell and Company remain optimistic. Powell said a “hard landing” for the U.S. economy was not “a likely scenario.”
Mike said they "had better keep those fingers crossed really, really, really hard," and pointed out yet another signal the economy is sliding toward a ditch.
"There was a historic surge in corporate bankruptcies last month. The half year bankruptcy number is higher than it’s been in over a decade. Keep in mind, the pandemic was this decade. This is indicative of the early stages of a meltdown. The entire economy has been running on credit cards for quite a while. We’ve seen a bit of a slowdown in credit card spending. People are tapped out buying what they need. They can’t afford stuff they just want. It’s only going to get worse, Powell’s wishful thinking notwithstanding."
On top of that, Mike said he's still convinced something is going to break in the financial system or the economy.
"We’re set up just like we were before the 2008 financial crisis. Remember, they were cutting rates in 2007 and saying everything was fine. Not so much. Regardless, it looks like the rate cuts are coming. That’s driving the gold market now. What’s it going to look like when they have to cut quickly to zero because the economy is crashing? Or when CPI starts creeping up again. Because, as I’ve said over and over, the Fed hasn’t done enough to slay inflation. It’s going to be interesting to watch!"
Mike then hops on his soapbox and explains his response to a commenter who claimed the gold rally was insignificant because the inflation-adjusted price was higer 44 years ago.
He closes out the show noting investors should pay attention to silver as well as gold. The gold-silver ratio remains historically wide, indicating silver is underpriced compared to gold.
"I think silver has a lot of upside."
He then gives listeners a call to action.
"Now might be a good time to talk to a Money Metals' precious metals specialist. Just call 800-800-1865."
About the Author
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
