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LAWRIE WILLIAMS: Volatility continues in gold and equities post big rate hike

The markets have now had time to digest the ramifications of the Fed’s big 75 basis point interest rate hike at last week’s FOMC meeting.  To our minds the response has been somewhat illogical.  If anything, equities have generally traded stronger, while gold has fallen back, although not particularly significantly in percentage terms.

The trend towards stronger equities at least in part results from the widespread belief that the Fed will reverse its more hawkish approach ahead of the midterm elections and return to some form of Quantitative Easing in order to try and prevent a U.S. recession.  Consequently the odds of another 75 basis points rate increase at the July FOMC meeting have fallen right back, and the likelihood of a similar sized rate hike in September has sharply diminished also.

While much of the commentary below specifically relates to U.S. markets, it is these which tend to set the global gold price.  Central banks elsewhere tend to follow the Fed’s lead so what happens in the U.S. has worldwide ramifications too.

U.S. economic policy all comes down to the Fed recognising that a high level of inflation is here to stay for the next few months at least and that there is little it can do to slow it down given that the principal drivers are totally outside its control.  High, and rising, energy and food prices are being driven by external factors like the Russia/Ukraine war, Russian sanctions and the Chinese lockdowns and there is nothing the Fed can do to slow these down.  Its only influence would be on the margins, so the central bank’s logic may be to try and re-stimulate the U.S. economy regardless of the inflationary impact of so doing.

One other parameter over which the Fed has responsibility is the employment, or unemployment, level.  The latest four week data on this, which was released yesterday, suggests that employment levels may have peaked in the light of the latest inflation figures, despite an actual small fall in the overall total last week.  Anecdotal evidence certainly suggests unemployment may well actually be starting to rise again.  We await next month’s figures with interest.  These will constitute another factor the Fed will need to take into account when it considers again its future interest rate policy.

Meanwhile other global central banks seem to be reporting equally gloomy figures as the inflation malaise continues worldwide.  The Eurozone’s biggest economies – Germany, France and Italy – are all coming up with data which some commentators feel puts the whole Euro currency structure at risk yet again, and UK inflation levels are already at over 9%.  The Government here is in disarray and has just lost two significant by-elections, the fall-out from which has to put Prime Minister Boris Johnson’s future increasingly at risk.  A full scale General Election is still 2 years away, but there’s no guarantee that Johnson will still be party leader by then.

Is the U.S. heading for recession?  In his latest statement Fed chair Powell at least admitted that a recession is indeed possible, despite the Fed’s attempts to ward one off.  Indeed it may technically already be in one, and if not is awful close.  While the equity and bitcoin markets obviously feel that a full-scale recession may be less likely – hence their tentative mild recoveries – we’re not so sure. 

Consensus seems to be swinging towards only a 50 basis point interest rate rise at the July FOMC meeting, in itself a level which might have precipitated an equities slump only a week or so ago.  Currently, though, after the 75 basis point rise in June, this seems to be being seen as a bullish factor.  But if the July CPI announcement does not show any signs of inflation coming back down, we think another 75 basis point rise would be highly likely again.

We are indeed living in ‘interesting times’ both economically and geopolitically.  Should all the doubts these factors raise continue, then inflation will remain elevated and volatility in equity, bitcoin and gold prices will remain.  As we have done in the past, we still feel the case for gold and gold stocks remains far more positive than that for equities and bitcoin and that a global recession is almost inevitable.  Maybe we are a voice crying in the wilderness, but what will be, will be.  Gold investors hold the faith.  Hopefully it will help protect you, at least in part, for what may lie ahead.

25 Jun 2022 | Categories: Gold, Russia, US, FOMC, Bitcoin, UK, inflation

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