Submitted by Jeff Opdyke via The Sovereign Investor, [7]
Gold has a message for the market: You’re a nut if you trust the Fed.
In the days since the arbiters of American monetary policy raised interest rates on December 16 - the first rate hike in nearly a decade - gold prices have pretty much gone nowhere. On December 15, the day before the Fed’s announcement, gold closed near $1,065. As I write this, it’s at $1,070 … and it has seen a high of $1,084 and a low of $1,052.
Like I said, it has gone nowhere. Which, if you believe the claptrap that passes for institutional knowledge and learned wisdom on the business news channels, defies preconceptions about the metal.
It’s that defiance that says everything you need to know about economic expectations in America and the future direction of interest rates.
It says: Now is as fine a time as any to add to your gold holdings - or initiate a position if you own no gold.
The greatest knock against gold is that it is effectively a dead investment.
Unlike stocks, it pays no dividends. Unlike bonds, savings accounts and CDs, it pays no interest. It just sits there, reminding us of the flaws inherent in fiat money.
Because of that characteristic, gold tends to struggle as an asset when investors can earn better returns elsewhere, or when the market holds expectations that interest rates are rising. After all, why own a dead asset when even a basic money-market account will earn increasingly higher yields in the coming months as the Federal Reserve, in theory, continues to raise rates?
The Fed governors expect rates to be in the 1.5% range by the end of 2016, implying that cash will be yielding well more than gold. And in the low-yield environment that has persisted for so long, 1.5% isn’t such a horrible return.
Only, there’s a wee bit o’ a problem.
The Fed kinda sucks at the prediction game.
Don’t Trust the Fed
Take a look at this chart I threw together. It’s based on the Fed’s stated expectations for U.S. GDP going into each of the years…
The Fed’s crystal ball is in serious need of a recalibration.
Fed governors simply haven’t a flippin’ clue what to really expect from the economy.
For 2016, the governors are projecting our economy will expand between 2.3% and 2.5% … which means we’re far more likely to see GDP grow at less than 2% next year, possibly much worse, based on how badly the Fed’s projections typically overshoot reality.
The gold market knows that. It knows that the U.S. economy is like an obese American who has taken up jogging to get into shape … only after the first lap around the track, it’s bent at the knees, huffing and puffing, and feeling like it’s gonna keel over.
As I’ve laid out in recent weeks [8], U.S. manufacturing is in a deep recession (as per the Fed’s own data!); corporate profits are in a recession [9] (because of the strong dollar, which will now get even stronger because of the Fed’s rate hike); and the supposedly robust jobs market is, structurally speaking, a sandcastle built atop a platform made of Popsicle sticks.
The New Gold Buyers
At the height on the gold-buying boom a few years ago, unsophisticated hot-money investors were flooding into gold only because gold was going up. They had no clue why and they didn’t care. So long as the price was rising, they were buying.
Today’s gold buyers are a far savvier lot. They’re buying based on the fundamentals of the economy, and gold’s place within a morally and financially bankrupt fiat monetary system.
That’s why gold prices have not come down since the Fed’s rate hike and the Fed’s contention that rates will go higher from here this year. Gold buyers don’t believe the Fed. They understand the signs pointing to a U.S. economy more feeble than the cheerleaders otherwise preach.
They realize, as I’ve been writing recently, that there’s quite a good chance that the U.S. is actually headed for a recession, given that an economic recession often follows a corporate-profit recession, and that 65% of the time an economic recession follows a manufacturing recession. Thus, they know, that there’s also a good chance that the Fed’s next interest rate move could be down again, rather than up some more. That, of course, depends on the timing of a recession, but the factors that would necessitate a rate decrease are clearly in place.
And if that happens — if we do see a rate decrease — gold will regain some strength.
So use current gold prices to your advantage. Build some insurance [10] into your portfolio. Gold [11] is the anti-dollar and it’s the antidote to the long-term monetary and fiscal problems that, like a chronic disease, continue to weaken America’s health.
But be sure you buy bullion or collectible gold coins. Steer very clear of exchange-traded funds (ETFs) such as SPDR Gold Shares and some others. If gold markets get messy or excessively volatile, or if the overall financial markets spin into a panic - or worse - ETFs of all kinds, including gold, could see substantial and worrisome issues with trading. So play it safe and just own the metal.
