Will New Fed Chairman Powell Really Allow Rates To Rise?

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Published : March 15th, 2018
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Category : Opinions and Analysis

On Tuesday morning Federal Reserve Chairman Jerome Powell testified before Congress. Of note was that right as Howell hinted at a somewhat slightly more hawkish than expected outlook, the bond market sold off.

“At the December meeting the median participant called for three rate increases in 2018. Since then, what we’ve seen is incoming data that suggests a strengthening in the economy and continuing strength in the labor market. We’ve seen some data that in my case will add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe. And we’ve seen fiscal policy become more stimulative.”

So I think each of us is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting, and I wouldn’t want to prejudge that”

As he was saying this, the yield on the benchmark 10-year treasury spiked from 2.86% to 2.91%.

In the past a hawkish Fed would have generally been a net negative to precious metals. However the context is crucial, because the system is now so far past the point of no return that even higher interest rates would lead to an environment favorable to gold and silver.

The reason is that at this point it really doesn’t ultimately matter what the Fed does or doesn’t do. To be completely honest, I personally believe that little will happen to the price of gold and silver until the unbacked paper contract selling is somehow resolved. With that said, understanding the corner the Fed has backed itself into can offer precious clues about what might lead to that resolution.

If Powell continues raising rates at the current pace, let alone at a somewhat faster than expected rate, that just shortens the amount of time between now and when the bubbles in the stock, bond, and real estate markets are popped. Should that occur, which would you rather own? Assets in these markets, or precious metals that can’t be debased and are not otherwise losing their value?

Of course in that scenario the Fed would likely respond with more easing. Quite possibly something of the shock and awe variety. Which of course would also be favorable to precious metals.

At this point there’s a degree to which new interest in gold and silver is more a matter of additional people becoming aware of the facts, rather then necessarily needing more evidence justifying the fundamentals. And each time the system crashes, more and more become aware of just how unsustainable the system has been for a long time.

That part is abundantly clear to most precious metals investors. But remember that most of the rest of the world has simply never considered what has become common knowledge to you.

Many (myself included) were finally awakened following the crash of the housing market a decade ago. This lead to further investigation that ultimately resulted in investing in precious metals. I also know of many others who fit into this same category.

So if Powell and the Fed continue raising rates and actually unload their balance sheet, that could well lead to enough turmoil in the markets to create enough demand for precious metals to pressure the short sellers.

So far it appears as if the Fed is going to continue as planned. And if that is indeed the case, many of the unnatural forces that have existed in the markets for the past decade are about to be tested.

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Andrew Hoffman was a buy-side and sell-side analyst in the United States (including six years as an II-ranked oilfield service analyst at Salomon Smith Barney), but since 2002 his focus has been entirely in the metals markets, principally gold and silver. He recently worked as a consultant to junior mining companies, head of Corporate Development, and VP of Investor Relations for different mining ventures, and is now the Director of Marketing for Miles Franklin, a U.S.-based bullion dealer.
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