After months of elevated inflation, investors are expecting big moves from the Federal Reserve today.
Analysts at Nomura Securities wrote last week that the Fed will jack up short-term rates to a range of 3.25%–3.5% today — and will end up increasing rates to as high as 4.75% by next year.
The federal funds rate now hovers in a range of 2.25%–2.5%.
Federal Funds Rate — 40 Years
As a result, billionaire hedge fund founder Ray Dalio said he was expecting a 20% decline in stocks.
Dalio wrote in a LinkedIn post, “I estimate that a rise in rates from where they are to about 4.5% will produce about a 20% negative impact on equity prices… The economy will be weaker than expected.”
Dalio continued, “This will bring private sector credit growth down, which will bring private sector spending and… the economy down with it.”
The S&P 500 has shed 6.6% since last Monday as inflation data ignited fears of a big rate hike. As I write this now, the S&P sits at about 3,850. Another 20% decline would put the index back under 3,100 and erase a year and a half of gains.
S&P 500 — Two Years
So what does it all mean for gold and precious metals?
Well, that’s anyone’s guess right now.
The precious metals market has become completely out of tune with traditional standards. Rising inflation tends to devalue currencies and boost demand for precious metals like gold and silver. But that hasn’t happened. Instead, the value of the U.S. dollar has soared to a 20-year high, as measured by the U.S. Dollar Index.
As a result, gold prices have plummeted from their March high of over $2,000 to almost as low as $1,650 an ounce today.
Gold Price — One Year
So how will a big hike in short-term rates affect gold?
Well, that depends on how the dollar will react. But given how the greenback has performed over the past several months, that’s completely unpredictable.
Part of what it takes to be an "expert" is knowing when you don't know — especially in investment markets. Public markets are (and always have been, as far as I can tell) highly irrational, and sometimes they become completely absurd. I mean, just consider everything from the Dutch tulip bubble to NFTs. Public markets have at least a 400-year history of throwing people curveballs.
Right now, the precious metals market is simply too upside-down to predict. As I mentioned to other subscribers earlier last week, the best move in the gold and precious metals market right at this particular moment is probably no move at all. Gold and precious metals will likely remain under pressure as long as the dollar stays strong. And there’s just no telling how long that will be or how much stronger the greenback might get from here.
That’s all I’ve got for you today, but before I let you go, I wanted to share some research my colleague Jason Williams just sent over.
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