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LAWRIE WILLIAMS: Another difficult week for gold

With the November FOMC meeting coming close, when the Fed is almost certain to announce the date for the beginning of the winding down (tapering) of its ongoing bond buying programme, the gold price has been having a difficult time.  It, alongside the other precious metals, has seen its price fall over the week, but only marginally so which will be of some comfort to gold holders.  It seems to have picked up a little in Europe today, but whether the gains will survive much past the U.S. open remains to be seen.

The forthcoming FOMC meeting may also hint at, or even schedule in, a proposed timetable for starting to raise interest rates to try and combat increasingly worrying rises in inflation, although we think that it may still hold off on any definitive date announcement.  After all, the inflation rise on its preferred Personal Consumption Expenditure (PCE) index is perhaps not high enough yet to precipitate any knee-jerk reaction on the timing of possible interest rate rises given apparent ongoing insistence that the rises seen to date are only temporary.

There is little or no doubt that inflation is rising faster than it has been in many years. Strong consumer demand, aggressive monetary and fiscal policy, and ballooning equity, house and bitcoin prices point to higher inflation for the foreseeable future and these inflationary increases could well be stretching well into 2023, if not beyond.  But will the Fed try and nip these in the bud using the interest rate weapon, or hold firm for the moment?

While the PCE Index may not be running high enough to prompt immediate action by the Fed, which may even welcome a higher inflation level, the more generalised Consumer Price Index (CP!) is perhaps generating more concern in sitting currently above the 5% level, and at its highest point since mid-2008.  Fed Chair, Jerome Powell, has been insistent that the current inflationary pressures are but ‘transitory’ and the inflation rate pattern of 2008 may well give him some comfort in this assessment.  Inflation came down sharply over the remainder of that year.

But arguably this time is different with the economy suffering the ongoing effects of, and recovery from, the Covid-19 virus pandemic.  The aftermath now seems to involve many businesses trying to play catch-up from the difficulties experienced from the virus itself and moves to try and control its spread, and this is coupled with ongoing wage inflation pressures, which the Fed seems to be doing its best to ignore.

From the Fed’s point of view, though, higher inflation coupled with maintained low interest rates could help it mitigate the huge debt levels that have been built up.  That is why we suspect that there might possibly be no statement regarding potential interest rate increases which could be considered as definitive in any way.

While the gold price has behaved nervously ahead of the Fed meeting, and could well see something of a take-down if, and when, the Fed announces its tapering timetable, this should have already been baked into its price level.  Gold always seems to react negatively to this kind of news. But unless the Fed is rather more forthcoming on the prospective timing of any interest rate rises – if indeed there are to be any increases in the near future – we suspect the yellow metal will bounce back strongly and take another run at the $1,800 level.

Overall, gold should see the benefits as long as monetary policy makers stay behind the inflation curve – in other words provided real interest rates remain distinctly negative, which we think is the most likely scenario.   Coupled with the high levels of government debt, negative real interest rates seem likely to be with us for, perhaps, years to come. 

Eventually gold investors will come to recognise the benefits of gold as a wealth protector alongside ever-continuing negative interest rates eating into currency purchasing power.  This probably won’t lead to massive gold price increases, but to a slow and steady price appreciation.  Gold will thus continue to do what it has done over the ages and provide an ongoing bulwark against value losses elsewhere.

01 Nov 2021 | Categories: Gold, FOMC

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