Price of Gold Breaks Slump on FOMC Decision
In its first meeting with Jay Powell in the chair, the Federal Open Market Committee (FOMC) of the United States Federal Reserve raised the nation’s benchmark interest rate by a quarter-point to a range of 1.5 to 1.75 percent, exactly one point higher than one year ago at this time. And, so far, it appears it will be exactly one percent higher next March, as the central bankers indicated no change in their forecast of three increases in 2018. They did, however, hint of more aggressive rate hike activity in the next two years.
Isn’t Gold Supposed to Drop when Interest Rates Increase?
Precious metal strength is being attributed to the Fed’s outlook that the US economy is not the galloping locomotive that some quarters would have you believe. The ongoing inability of the Trump White House and GOP majority in both houses to get on track with an effective economic program, the threat of trade wars with friend and foe alike, and the never-ending domestic and global turbulence from Washington to Moscow to Pyeongchang and the underlying feeling that these could escalate at any moment appear to be contributing to a sense that … gold makes sense.
Interest rate increases appear to be established as the norm in the USA but perhaps not as rapidly as was very recently being predicted by investment analysts. Wall Street speculation has been rife that the Fed would make 2018 a four-hike year instead of only three. And this possibility remains, as some observers believe the FOMC was one vote short of doing just that. They stuck with three while changing their forecast of two rate increases in 2019 to (at least) three, and (at least) two increases in 2020 instead of one.
Traditional investment theory holds that gold prices drop as interest rates rise because better returns can be wrought from interest-bearing concerns. Setting aside this notion (which has been disproven over and over again), there is a stronger and more natural economic indicator to keep your eye on: Inflation. Gold is the best inflation hedge, protecting your wealth as paper money loses its worth.
While mainstream economists tend to view inflation, stock markets, etc. as cyclical trends, some see a much more ominous and irreversible path in the not-distant future. One of these is Egon Von Greyerz (frequently seen on CNBC). His take on these discussions is highly recommended.