Tonight we explore: 

• The true relationship between gold prices and interest rate hikes and why gold and silver prices are poised to surge much higher

• Why so many of us have been taught that rising rates are bad for gold

• How the sudden about-face from the Federal Reserve speaks volumes about the real reason for rate hikes, and why the Fed will be forced to follow through

“Nothing is so painful to the human mind as a great and sudden change.”

– Mary Wollstonecraft Shelley

Over the last several weeks it has become abundantly clear that there is a significant u-turn happening at the Federal Reserve.

One year ago, the Fed was promising they wouldn’t raise rates until at least 2023, with most governors pointing to 2024 as a more realistic time frame for their penciled-in rate hikes.

In fact, Jerome Powell was famously quoted as saying “We're not thinking about raising rates, we're not even thinking about thinking about raising rates." 

They promised to let inflation ‘run hot’ and well above their 2% target for some time, but the Fed’s current actions reveal clear truth.

In recent weeks, the market has come to learn that the Fed is actually considering not just 3, or even 4, but 5 or more rate hikes and significant balance sheet runoff – all in 2022. 

Why the sudden change of heart?

For the true catalyst, we need to look no further than tomorrow’s CPI release, which nearly all economists believe will show year-over-year inflation above 7%, with a potentially significant jump from last month’s super hot 6.8% CPI print.

The Fed can no longer deny the truth and are now being forced to come clean and deal with it far more directly than anyone previously anticipated. As markets struggle to determine what this all means for the future of asset prices, we highlight a key truth which all gold investors must be aware of: when the fed raises rates, it’s rocket fuel for higher gold and silver prices.

I’ll be covering this in detail during a free live presentation next Tuesday called On Thin Ice.

Click here to register for the free presentation now

For too long, Wall Street has sold the idea that higher interest rates are bad for gold. Their story suggests that since gold pays no dividend, it’s less appealing when interest rates are rising higher. 

But the evidence is quite the contrary.

In the last 17 years, there have been two rate hiking cycles.

The first occurred from June 2004 through July 2006. During this time, gold prices rose in value during this 2-year window from $345 to $637, for an increase of 85%. During this same span, silver prices rose from $9.63 per ounce in June of 2004 to $17.72 at the end of July 2006, an almost identical increase of 84%. Both mirror increases occurred as the Fed Funds rate went from 1% to 5%.

The second round of rate hikes began in December of 2015. The first rate hike coincided with a low point for gold of $1,058. Just 9 months later, gold prices rose 26% to hit $1,327 in September of 2016. Silver rose as well, going from $16.21 in December 2015 to $22.12 in September just 10 months later for an increase of about 37% (both with less than a quarter percent increase).

If you’re wondering why this is the case when so many of us have actually been taught the opposite – that rising rates are “bad” for gold – we must understand the underlying truth of the Fed raising rates and tightening monetary policy: It’s an admission that inflation is running too hot, and well above a healthy range they can control.

These rate hikes (or lack thereof) are reactionary to the market. When the market sells off in response to the threat of a rate hike, the Fed walks it back. 

And in a decade where propping up financial assets has been the focus of the Fed, it is only logical that they should pin rates at zero percent to push those assets higher, leaving gold as ‘collateral damage’ by the wayside. It’s why over the last decade, as the Fed has manipulated with zero interest rate policies, the paper markets have exploded while physical precious metals have underperformed.  

Now, it could be that gold and silver prices have an unprecedented opportunity to soar.

We believe the next several months will reveal not only a changing of the guard at the Federal Reserve in personnel, as 3 new governors must be appointed, but also in the structure of financial assets, and most importantly for our readers, we believe a significant move higher in gold prices as the Fed moves away from extreme accommodation to attempting to rein in the runaway freight train posed by inflation. 

Anyone who doubts the new focus of this new Federal Reserve regime need only listen to Jerome Powell’s upcoming testimony to Congress when they will ask him under oath about the Fed’s intention to raise rates and tighten monetary policy. The entire Fed seems to suddenly be hawkish, with all focus on tightening monetary policy.

While this historically has been a strong headwind for financial assets, it’s been rocket fuel for gold prices.

Interestingly, gold prices surged 1.32% higher and silver jumped 1.54% higher, both outdoing the equity markets on the day. 

We expect that trend to continue and why we believe precious metals prices are imminently poised to continue their recent surge.

Best,

Adam Baratta

Editor-in-Chief

Brentwood Research