The U.S Fed holds a meeting next week (18 Sep) to decide on the direction of interest rates. Markets and market participants have been making bets on whether this would be a cut in rates, and if so, whether by a meagre 25 basis points (0.25%), or perhaps 50 (0.5%).
The Fed setting the price of money in the U.S is important because it can have quite a global impact, namely - a reduced rate means lower interest rates on unsustainable U.S consumer and government debt and more consumer spending, higher US stock prices as the discount rate is lower which means higher valuations, mimicked by other global central banks in lowering rates as they tend to follow what the Fed does, and more capital being invested in assets and projects outside of bank savings and money markets as returns outside become more attractive on a relative basis.
Fed Chair Jerome Powell has insisted their decisions are led by incoming data - more specifically related to the two key factors which they manage: inflation and employment. In this vein, the latest U.S core CPI inflation figures were released yesterday, showing that inflation again picked up in August, thus weakening expectations for a large rate cut next week. If it happens, it will be modest.
Generally, when interest rates are lowered, the attractiveness of exposure to gold increases and so should the price, and vice versa. But gold has also been on a tear since the Covid lockdowns, when U.S interest rates went from near zero to over 5%, and the gold price rose from $1,800/oz to $2,500/oz. This is largely a result of the inflation-hedge trend by traders, retail and professional investors.
With inflation raging and most currencies weakening due to massive money printing during COVID-19, the world has been protecting themselves using gold as the inflation hedge - regardless of the direction of interest rates. World Gold Council data shows that central banks, the professional money side, have stocked up on over a thousand tonnes annually in recent years, while demand for bars and coins and investment jewellery has boomed in Asia especially. Russian news has now indicated that the nation is increasing gold bullion purchases by RUB 8.2bn daily on surplus oil revenues. Everyone is protecting their purchasing power.
There’s been some short-term consolidations here and there as profits are scooped when the price shoots up, but generally, the gold price is seeking to test out further highs towards the $2,600/oz level. On the interest rates for next week, traders are wagering a 0.25% cut.
The U.S. is heading toward bankruptcy, or more accurately, a sovereign debt default. America’s debt is now 120% of GDP, and neither party is mentioning fiscal austerity if they take office. So it matters not who wins the election - Trump or Harris, the dollar is the lamb for slaughter to repay the debt mountain. “The combination of geopolitical risks, fiscal concerns, and monetary policy shifts form a bullish case for gold as a hard asset regardless of who wins the election in November”, according to Ole Hansen, Head of Commodity Strategy at Saxo Bank.
There are these Johnny Cash lyrics from his song, Folsom Prison Blues, that remind me of the gold price and where it should go next. “I hear a train a-comin’, it’s rolling round the bend. And I ain’t seen the sunshine since I don’t know when, I’m stuck in Folsom Prison, and the time keeps draggin’ on, But that train keeps a-rollin’ on down to San Antone.” Higher, San Antone, Higher.
The gold price was last seen trading at $2,519/oz.
