The price of gold is set to record its worst month since 2016.
But the pieces are still in place for a major bull run.
Gold prices have shed more than 7.5% this month, dipping below $1,750 an ounce yesterday. Prices have largely been pulled down following mid-June’s FOMC meeting, where board members projected raising interest rates earlier than previously forecasted.
Gold — One Month
Thirteen of the 18 FOMC members now say they believe the Fed will increase rates in 2023. Seven of them even see the Fed hiking rates as early as next year.
These new projects strengthened the U.S. dollar and, in turn, eroded some of the appeal to gold.
USD Index — One Month
Following the mid-month sell-off, gold prices remain weak. Gold has failed to break above its 100-day moving average in recent days, leaving technical traders cautious. But I think the FOMC sell-off was mostly a knee-jerk overreaction and gold will, sooner or later, recover to start heading much higher.
Fact is, everything else the Fed had to say was bullish for gold. Most important, IMO, was the Fed’s stance on inflation.
In addition to a more hawkish stance on rates, the Federal Reserve also sharply increased their inflation forecasts.
The Fed now predicts inflation running at 3.4% this year — which is well above the central bank’s long-term 2% goal.
Inflation in the U.S. has steadily been on the rise over the past several months. As it has crept higher, Fed officials have continued to downplay the negative public image, saying that increasing inflation actually works to the benefit of the bank’s long-term goals.
The message the Fed wants to send — but doesn’t exactly want to be explicit about — is this: Higher inflation right now is acceptable because there have been years of lower inflation.
And you can probably understand why the Fed doesn’t exactly want to say that explicitly. It’s sort of like telling someone you’re going to increase their rent now because you’ve been undercharging them for years. That kind of thing doesn’t go over very well.
Here’s how the Fed puts it with explanation:
For many years, inflation in the United States has run below the Federal Reserve’s 2% goal. It is understandable that higher prices for essential items, such as food, gasoline, and shelter add to the burdens faced by many families, especially those struggling with lost jobs and incomes. At the same time, inflation that is too low can weaken the economy. When inflation runs well below its desired level, households and businesses will come to expect this over time, pushing expectations for inflation in the future below the Federal Reserve’s longer-run inflation goal. This can pull actual inflation even lower, resulting in a cycle of ever-lower inflation and inflation expectations.
Regardless of the Fed’s rhetorical expertise, the fact remains: Inflation is still heading higher.
And for gold, that fact remains significant.
For the past several months the Fed has continued to tell the market that if inflation does get out of control, it has “tools” to render it lower.
Answering questions by a special House subcommittee just last week, Fed Chair Jerome Powell repeated that to lawmakers saying, “You have a central bank that’s committed to price stability and has defined what price stability is and is strongly prepared to use its tools to keep us around 2% inflation.”
But those “tools” seem to be failing. And many are concerned about a return of 1970s-style inflation, which brought on the biggest gold bull market in history — so far.
As you know, I have been a gold investor for a long time. So I understand if it sounds biased coming from my mouth. But I think it should be blatantly clear to everyone that it makes sense to have at least some exposure to gold right now — even if just a little as a hedge.
I urge you to take advantage of the recent gold selloff today before it’s too late.
