Since the conflict with Iran started earlier this year, gold and silver have been trending down on news of war or contentious peace talks and up on hopes of ceasefires and peace treaties. At first blush, this may seem counterintuitive.
But dig a little deeper… and it makes perfect sense.
All Eyes on the FED
Since the Federal Reserve started raising interest rates post-pandemic, the markets have fixated on them. It is as if nobody can make a financial decision without first considering what the Federal Reserve will do next with interest rates.
And this is precisely why gold and silver prices have tracked the likelihood of either peace or war in Iran.
The progress we have seen in our world over the past one hundred plus years has been fueled by gas and oil. It would not be too much of a stretch to say it is what makes our world turn… figuratively that is.
And make no mistake… oil is front and center regarding the Strait of Hormuz and the Iranian conflict. As long as this conflict remains unresolved, oil prices will be elevated. As long as the Strait of Hormuz remains choked off, oil prices will be elevated. As long as the United States and Iran remain deadlocked over nuclear capabilities, oil prices will be elevated.
And as long as oil prices remain elevated, gold and silver will be under pressure… because of the impact that has on the Federal Reserve’s ability to lower interest rates.
There is this dogmatic belief among market participants that higher interest rates are negative for gold. The thought is that when interest rates are high, investors can get a “risk-free” return on investment by holding a term deposit versus taking a chance risking their capital on the purchase of gold or silver.
And that may very well be true when interest rates are high. But… what is “high?”
Everything Is Relative
In the late 1970’s, Federal Reserve Chairman Paul Volcker put an end to inflation (and gold’s decade-long rally) by increasing interest rates to over 20%.
Even with the sky-high inflation of the time, with interest rates at 20%, you could absorb that inflation and still generate a positive real return. Your real return on investment was basically the interest rate you earned less the current rate of inflation.
Forty-six years ago, Chairman Volcker could raise rates that high because the U.S. debt was still small enough to be serviced at 20%. Chairman Volcker did not have to finance $39 trillion worth of debt at 20%.
It was much more manageable.
Last Friday, new Federal Reserve Chairman Kevin Warsh was sworn in. Chairman Warsh faces a much different scenario than Chairman Volcker did. He has been painted into the corner, and there is no way out solely via his interest rate policy decisions.
Warsh Is Powerless
Here is where I get so frustrated with the dogmatic belief that higher interest rates are bad for gold. I think that general statement is very misunderstood and is misleading investors from the wise decisions they should be making right now.
Simply put… Investors are being discouraged from owning gold precisely when they should be buying it.
Right now, the interest payment on the debt is the largest line item on the federal government’s budget. Most of our taxpayer money goes simply to servicing debt.
Further, as long as tensions persist in the Middle East, oil prices will stay elevated. Since oil drives every aspect of the world economy, prices of every good and service are likely to cost more in the future. The Consumer Price Index (CPI) and Producer Price Index (PPI) are signaling that right now.
That will force Chairman Warsh’s hand. He will need to raise interest rates to push back against the rising prices. But that will lead to higher debt service costs, the expansion of the money supply to cover the shortfall, the dilution of the purchasing power of every U.S. dollar, and further increases in the prices of goods and services.
I have said this for decades now. Until Congress stops overspending, nobody at the Federal Reserve can solve our financial problems. Our economy is suffering from fiscal irresponsibility at the hands of Congress. They alone hold the key to debt reduction and the control of inflation.
Chairman Warsh and the FED (just like Chairman Powell before him) are powerless.
Do Not Lose Focus
If you want to know where the price of gold is going in the future, stay laser focused on the money supply. If it is expanding, the gold price will go higher. There is no other way for this to play out.
Take a look at the chart below…
Unless Congress changes its ways, our path forward is very clear. The almighty U.S. dollar will continue to lose purchasing power.
To protect yourself for the future, you need to be buying gold right now… when it is cheap and hated. Take those temporarily and artificially strong U.S. dollars right this minute and use them to buy gold and silver well… with low Spot Prices and low premiums.
DO NOT be fooled by the narrative that interest rates are high right now. They are not.
With the current interest rate at 3.5% and inflation currently running over 3%, your real return on a term deposit is absolutely nothing.
Yet, if you hold those dollars into the future, they will be worth less and less over time in regard to purchasing power.
BUT… if you exchange some of those U.S. dollars right now for gold and silver, you will be cryogenically freezing your purchasing power for use in the future… if and when you need it.
DO NOT be distracted.
DO remain focused.
Shed dollars here and now for gold and silver. It is the best way I know to Keep What’s Yours.
Call us toll-free at (800) 831-0007 or email us and we will show you how easy it is to preserve your purchasing power with gold bullion.