When markets forget that Central Banks cannot fix the world with interest rates

It would be easy for those who have decided to buy gold and silver bullion to lose heart over the precious metals, had they seen how prices reacted to Chairman Powell’s comments, last week.

However, to do this would be very short-sighted. Whilst Powell may well have signaled that the Fed will stay on this path of tightening this does not mean that they have resolved the issue. Rather, it likely means that the Fed is reacting a little too hard, a little too late and this will almost certainly pave the way for gold and silver investors.

Central Banks come under scrutiny

The Federal Reserve of Kansas City hosted its annual policy symposium for central bankers on Thursday and Friday of last week.

This was the 45th year of the annual event that is held in Jackson Hole Wyoming. During turbulent markets, a central banker’s every word is scrutinized to extract information from presentations on future policy moves.

The highlight of this year’s conference titled Reassessing Constraints on the Economy and Policy was Fed Chair Jerome Powell’s Friday morning presentation.

Powell’s short presentation focused on the Fed’s continued campaign to bring inflation down close to its 2% target.

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Gold and silver prices both declined sharply as interest rate expectations rose (along with the US dollar and real rates). US equity markets also declined with the S&P 500 Index plunging 3.4% on Friday.

Key statements from Powell’s presentation included:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy …

We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent …

Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions …

Powell’s statement regarding what the September 20-21 meeting might bring in the way of additional hikes reiterated what he said at the July Fed Meeting

that another unusually large increase could be appropriate at our next meeting. We are now about halfway through the intermeeting period.

Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook …

While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down …

In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, [this is] not a place to stop or pause …

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The lower inflation reading Powell referred to was that both the Consumer Price Inflation Index (CPI) and the Personal Consumption Expenditure Index (PCE) came in slightly lower in July than June, the CPI at 8.5% compared to 9.1% in June and the PCE at 6.3% compared to 6.8% in June.

It is too early to know if the lower numbers are merely a pause in inflation or a turning point into inflation declines.

Either way, the Fed remains well behind the inflation curve with the fed funds rate only in the 2.25% to 2.50% range.

However, the Fed and other central banks also must consider slowing economic growth, wobbly housing markets, lower equity markets, and rising debt servicing costs for both households and governments.

Especially in Europe, the rising costs of natural gas and low storage supply are already stretching household budgets to breaking point even before winter sets in.

Fed Fund Rate and Inflation Indicators

Fed Fund Rate and Inflation Indicators

Central Banks have Lost their Sense of Reality

Central banks have printed so much money and kept interest rates low for so long that the unwinding of the damage is going to take time. As Powell stated there will be pain as households and governments sober up from the long party of low rates.

The main problem now is that central banks have lost their sense of reality. Also, central banks are likely to now push rates too high, resulting in a deeper recession than otherwise.

According to the CME Group’s FedWatch Tool, the probability of another 75-basis point hike by the Fed at the September meeting has increased back up to almost 70 percent. 

The probability that the fed funds rate will end the year in the 3.75% to 4.00% range is up to 60% (this is 1.5% higher than the current rate). Markets are currently placing the highest probability on the fed funds rate remaining in this range or being lower by July 2023.

However, these probabilities do change quickly as new data points are released. Before the September meeting, there is an employment report scheduled for Friday. Also, CPI data for August to name a couple of the data releases still to come.

The bottom line is gold and silver investors still require patience. However, the day of reckoning will come, and prices will break out of their sideways channel.

Circling back to the Jackson Hole Symposium we leave the reader with the last quote from economist Edward Kane from the 1983 symposium. This quote seems very relevant to the current monetary policy environment:

“ Depending on which economic indices one emphasizes and how one takes into account other potentially relevant developments, the (October 1979) change in FOMC policy framework can be portrayed as spectacularly successful, relatively unimportant or absolutely disastrous in its effects.”

Kane went on to say that in his view it was the third option. Remember this was just after back-to-back recessions, the second of which lasted for 16 months. Some of the reasons Kane viewed the policies as “disastrous in its effects”. This Includes generally slower economic growth rates, higher unemployment, bankruptcy, and foreclosure rates.

If you enjoyed this little piece of insight into the kinds of discussions we have in the GoldCore office, then why not subscribe to our YouTube Channel. There you will find a host of interviews and discussions from the great minds, commentators and experts in the financial and precious metals markets. You can see our latest interview with Jim Rickards and Marc Faber, here.

Dinner Party with Marc Faber, David Morgan and Jim Rickards


From The Trading Desk


Market Update
Gold has closed lower over the last five months, the last time it had a similar performance was when it closed down for 6 consecutive months in 2018.

However, when gold did finally put in its low in 2018, gold moved higher over the next 18 months and put in a new high In August 2020.

The question is are we at a similar point now, we do look very oversold here.

A recent note from Standard Charter Bank sees the downside risks limited from here as a lot of the risk is already priced into the gold price.

The USD has reached 20-year highs recently, the next interest rate hike in September is currently priced at 75bp.

We could get a more dovish Fed where a rate rise comes in at 50bp and a pause from there for November and December as the Fed is data dependent and may like to see the impact of the recent hike before raising further.

Keep an eye out for US job numbers to be released on the 2nd of September. 

At GoldCore over the last couple of months, we have continued to see existing and new clients’ cost average in the market.

We have not seen clients selling down with a buy-through rate of 80%. 

Stock Update 

Silver Britannia offer UK – We have just taken delivery of 10,000 Silver Britannia’s at our London depository.

Available for storage in London or immediate delivery within the UK. These are available at the lowest premium in the market  (which includes VAT at 20%).

You can purchase these online or contact our trading desk for more information. 

Excellent stock and availability on all gold coins and bars. Please contact our trading desk with any questions you may have. 

Silver coins are now available for delivery or storage in Ireland and the EU with the lowest premium in the market.

Starting as low as Spot plus 27% for Silver Britannia’s.

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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)

31-08-2022 1712.40 1715.90 1472.15 1478.08 1713.60 1715.21
30-08-2022 1734.00 1730.30 1475.81 1481.31 1726.37 1727.36
26-08-2022 1752.10 1751.25 1480.52 1475.95 1751.05 1741.09
25-08-2022 1762.40 1753.55 1489.23 1485.26 1763.81 1760.04
24-08-2022 1752.00 1745.65 1483.59 1483.10 1760.41 1759.79
23-08-2022 1739.45 1746.55 1479.05 1473.04 1752.84 1744.80
22-08-2022 1732.80 1733.25 1467.34 1471.01 1731.24 1737.93
19-08-2022 1752.90 1750.75 1476.12 1480.96 1738.53 1742.00
18-08-2022 1765.60 1765.55 1466.15 1470.53 1737.53 1744.36
17-08-2022 1773.65 1767.20 1465.92 1463.77 1742.97 1737.16
16-08-2022 1776.15 1774.85 1476.16 1469.22 1752.70 1745.92

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Learn why Switzerland remains a safe-haven jurisdiction for owning precious metals. Access Our Most Popular Guide, the Essential Guide to Storing Gold in Switzerland here

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Stephen Flood

Stephen Flood is the CEO of GoldCore. He is a former Wall Street equity trader and FinTech expert. He has been involved in the precious metals markets since 2004 and has appeared as an expert contributor on CNBC, CNN, BBC, RTE & Bloomberg TV and has had articles published in the Irish Times, Irish Independent and The Sunday Business Post.

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