By Mike Gleason
Precious metals markets enter November’s trading with bulls eying a potential year-end rally.
Gold and silver prices did manage to post gains on Wednesday and Thursday after the Federal Reserve announced a quarter point rate cut. But the Fed followed up its move with language suggesting interest rate policy is now on pause.
News Anchor #1: The Federal Reserve cut the benchmark rate by a quarter of a percentage point. It’s now at 1.5% to 1.75%. The rate cuts come on a global slowdown; they say. Also muted inflation. Now the Fed does signal in this statement a pause for future rate cuts. The Federal Reserve statement changes the words from “act as appropriate” to “assess.”
News Anchor #2: Fed Chairman Jerome Powell signaled that the rate-cutting exercise is likely over for now.
Jerome Powell: We think that the current stance of policy is likely to remain appropriate, likely to remain appropriate, as long as incoming information about the economy is broadly consistent with our outlook, which is a positive one of moderate economic growth, strong labor market and inflation moving close to 2%.
Fed chairman Jerome Powell may say the current Fed funds rate is “likely to remain appropriate,” but Fed officials aren’t necessarily the most reliable forecasters of their own policy moves.
This time last year, they certainly weren’t expecting to be delivering rate cuts and bailing out the repo market with hundreds of billions of dollars in liquidity injections.
In fact, Fed policymakers were giving guidance that 3 to 4 more rate increases were planned. Instead, they have done the opposite. They just cut rates for a third time in 2019.
The Fed could end up orchestrating more unplanned interventions in the months ahead. With so much uncertainty in the economy, in U.S. politics, and in geopolitics, investors should brace for some surprises and potential black swan events that nobody sees coming.
Gold is historically and remains a premier asset to hold during uncertain times.
Global demand for physical precious metals is on the rise this year from a number of different sources. It’s not making major headlines in the United States, but robust gold buying from the Far East including China and Russia is slowly changing the dynamics for precious metals markets.
Last year, surging monetary demand from Russia and China resulted in the most global central bank buying of gold since the United States closed the gold window on the dollar in 1971.
According to official reports, China has added 106 tons of gold to state reserves so far in 2019, while Russia has acquired 145 tons of new gold. Trade disputes and the threat of widening economic sanctions appears to be accelerating gold accumulation among U.S. adversaries.
The global gold trade is steadily shifting east for other reasons. For one, the rising middle class in India and China has an enormous and growing appetite for gold jewelry.
The Chinese are also becoming more aggressive in buying and developing gold mines and trading the monetary metal on Chinese exchanges. In just the first six months of this year, gold trading on the Shanghai Futures Exchange doubled to a total value of more than $1.2 trillion. If this rate of growth continues, gold futures may one day be quoted around the world in Chinese yuan.
Despite all this, it’s doubtful that Chinese authorities intend to pursue sound money principles and transition to a gold-based yuan. They will continue to depreciate their currency just like the United States and other countries are doing.
The longer that international trade disputes go unresolved, the more likely that tit-for-tat currency devaluations will take place. The U.S. dollar has strengthened versus foreign currencies since 2018. But it declined in October and has room to decline much further in the months ahead should “weak dollar” fiscal and monetary policies prevail.
The Fed isn’t fully in line with the Trump administration in that regard. President Donald Trump continues to call for a more aggressive rate-cutting campaign from the central bank.
But the recent massive and unexpected expansion of the Fed’s balance sheet may be a game changer for the dollar. Even if the Fed remains on pause when it comes to interest rate moves, it will still effectively be continuing to ease in the months ahead through its repo market operations and Treasury bill purchases.
The prospects of that translating to a weaker dollar and higher inflation rate are pretty good. And precious metals could be among the prime beneficiaries.