Fed’s Jerome Powell Says More Rate Cuts are Possible; How Will This Affect Gold?

Slowing global growth and trade-war hysteria could give the Federal Reserve more justification to lower interest rates in the coming months, Chairman Jerome Powell said Friday in a highly-anticipated speech at the annual Jackson Hole Symposium. Powell’s comments came just as U.S. stock prices experienced another brutal selloff, wiping out gains for the week and driving investors into the safety of gold and other haven assets.

As gold enters a new bull market, investors are wondering how Fed policy will impact the digital asset. The truth: We don’t know for sure because there’s not much solid correlation between the federal funds rate and bullion. However, there’s good reason to believe the next easing cycle will be bullish for gold.

Interest Rates and Gold Prices

While conventional wisdom states that interest rate increases are bearish for gold because they increase demand for the U.S. dollar and fixed-income securities, history paints a different picture. As Investopedia notes, gold’s massive bull market began in the 1970s and continued for many years during a period when interest rates were high and rapidly increasing. Although gold prices increased in the 21st century while interest rates were in decline, there’s no sustained correlation between the two events.

In other words, gold has experienced bull markets when rates rise and fall, so it’s not enough to just look at monetary policy.

In the current macro climate, rate hikes are utterly inconceivable. The Federal Reserve tried them last year before realizing that a debt-fueled economy cannot survive higher borrowing costs. The Fed appears keen on letting the debt bubble continue to grow, so it won’t raise interest rates again for a long time (if ever). Policymakers not only slashed rates last month for the first time in over a decade, they will likely do so again in September.

In an environment where monetary easing is required, perhaps indefinitely, gold is likely to benefit as a safe-haven investment. Every rate cut by the Fed, ECB or RBA is an admission that local economies are not performing up to par and that developed nations cannot survive rate normalization.

Lower interest rates also fuel inflation by increasing the money supply. Governments and central banks vastly understate inflation through their consumer price indexes. Gold is a hedge against inflation.

Then there’s the elephant in the room: Negative-yielding government bonds have reached a record $16 trillion. If the next financial crisis is caused by the bond markets, gold is likely to benefit as one the only reliable stores of value.

Gold Price Update

A fresh selloff swept the U.S. stock market on Friday after President Donald Trump vowed to respond to China’s latest retaliatory tariffs. As the Dow Jones Industrial Average plunged more than 600 points, gold surged.

Gold for December settlement, the most actively traded futures contract, spiked $29.10, or 1.9%, to $1,537.60 a troy ounce on the Comex division of the New York Mercantile Exchange. The yellow metal peaked at $1,540.30 a troy ounce, which is roughly $6 shy of a six-year high.

Source: Bloomberg.

Bullion is up 20% this year and 27% over the past 12 months. By comparison, the Dow has gained 10% this year but has returned a paltry 1.8% over the past 12 months.

Featured image courtesy of Shutterstock. Chart via Bloomberg. 

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi