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Where does gold go now that the Fed is tightening?

Sean Brazney & Jeffery Christian
May 12, 2022
Video Transcript

Sean Brazney: Hello! My name is Sean Brazney, Sales Director for Monex Deposit Company. I’m here today with Jeffrey Christian, who is Managing Partner and Founder of CPM Group. One of the many analysts there over at CPM Group. He is also the author of our, Precious Metals For More Than Just Inflation report, which is out now. Thank you for joining us today Jeffrey.

Jeffrey Christian: Always a pleasure to meet with Monex.

Sean Brazney: I want to touch base on a couple of things that I’m hearing about a lot on the phones when I’m talking to investors. One issue seems to be that we’re…we’re kind of slowing down in the economy. We’re seeing and reading some reports about tightening…Fed tightening and taking away accommodation into a slowing economy and looking out over the rest of this year, hearing some, somewhat seemed like, lofty goals on raising rates several more times as we go into the year and I’m hearing investors talk a lot about thinking that the Feds are going to get caught or trapped at some point, maybe after this May meeting that we just had, but definitely sometime June or after. They think the Fed will get trapped and have to reverse course. Have you heard anything or can you add anything to this for us?

Jeffrey Christian: Oh, I’ve heard a lot about that. There’s a lot of those kinds of conversations. We don’t think that the Fed will get trapped, at least not this year. It is facing a very difficult task and I think it’s important to understand the relationship between the Fed and monetary policy on the one hand and inflation and economic growth on the other hand. It does have a tough job, but we think that there is enough slack in the economy that it can probably navigate these treacherous waters and that while it could find itself in a box, it may be a year and a half to two years from now before that happens. The key to understand is the Fed controls monetary policy, and to some extent interest rates, and money supply. It can heavily influence demand, the demand side of the real economy with interest rates and money supply, but the supply side is much less sensitive to the interest rate changes and money supply and a lot of the inflationary pressures we’re seeing right now are on the supply side of the real economy— the supply of oil, the supply of semi-conductors, the supply of all sorts of stuff—and the delivery of supplies, you know, compounded by the Russian invasion of Ukraine, the zero Covid policies of China, and a host of other factors, including the fact that a lot of workers are deciding to change jobs or leave the job force on a temporary basis while they find themselves and things like that. So, the Fed isn’t the end-all and be-all of the kinds of policies we need to get us through this tough time. It can control money policy and interest rates, but it may find those policies that it does confounded and conflicted by fiscal policies from the Congress and the White House. I think that that’s an issue, but you know, one of the messages I got in yesterday’s 50 basis point increase in interest rates is that the Fed says we see enough strength in the economy that we can raise interest rates 50 basis points for the first time in 22 years without killing the economic expansion that we’re in. So, I think that in that way, I’m in agreement with the Fed that there’s enough slack rope in the economy in the United States right now that it can raise interest rates and start to reduce it’s balance sheet without throwing us into a recession.

Sean Brazney: Oh, we’ll see if that’s going to play out here the rest of this year. The second question that’s coming up a lot and this has to do with whether there’s a positive or negative correlation out there and this has to do with the 10-year note. Last couple years, really going back to about the mid-2020, we saw that 10-year kind of basing down there just under .7% or .8% and it stayed down there for quite a while. It seems like that’s the low so far in that rate. Only to be today, I believe it was 3.07%or 3.08% and then at the same time frame we’ve seen gold go up by a good $300-$400 per ounce, really kind of going on the upside together. Showing really more of the positive correlation, but I still get investors that are telling me that… that the 10-year is going to run out of steam here, it’s going to roll over and that may be the next catalyst for gold on the upside. Now, what do you see in regards to that 10-year on gold.

Jeffrey Christian: Yeah, there are several things. First off, looking at interest rates increases and gold price increases is comparing apples to oranges. As interest rates are rising, the bond prices are falling. So, you actually do have a situation with the price of bonds is declining while the price of gold is rising. With that said, if you look at the correlation between changes in interest rates and changes in gold prices, it’s zero. I mean, there are times when they do move in opposite directions, but it’s zero. So, you can actually have a situation where interest rates are rising and gold prices are rising and that’s because they’re both reacting to the same set of other exogenous economic variables like: inflation, and growth rates, and employment, and unemployment, and labor negotiations, and the cost of labor, and international tensions. So, interest rates are rising, because of the inflationary pressures and other pressures in the economy and gold prices are rising, because of the same factors, and you can have that for an extended period of time. The other thing to understand is 10-year rates, as you’ve said, they’ve gone from .7% to 3% over the last couple years, at 3% with 8.5% inflation, you’re talking about a negative 5.5% interest rate on a 10-year note and there are very few investors who are going to say, “Oh Wow! I can lose 5.5% a year for the next 10 years by buying the 10-year treasury note, why would I want to own gold?” The answer is… hey you’re going to lose 5.5% in real value if you lock-in a 10-year treasury right now. So, that speaks volumes about why you should be buying gold.

Sean Brazney: Huge volumes. Very enlightening. Thank you for that Jeffrey. Again, our report for Precious Metals For More Than Just Inflation is out. Call Monex today. Talk to our account representatives and get the newest report for you. Thank you!

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