A Federal Reserve monetary policy statement which saw chairman Jerome Powell confirm that interest rate normalization will be initiated soon led to slides in the stock market. There are fears that a new recession could be triggered – something that would invariably bolster gold and give it substantial safe haven appeal.
Following the monthly Federal Reserve’s Open Market Committee (FOMC) meeting, Chairman Powell seemed to indicate that a ‘double tightening’ of measures could be on the table to tackle inflation, with rate increases paired with a balance sheet run off. He also seemed to suggest that several rate increases are on the horizon due to the strength of employment prospects. He commented, “There’s quite a bit of room to raise interests without threatening the labour market. This is by so many measures a historically tight labour market — record levels of job openings, quits, wages are moving up at the highest pace they have in decades.”
Danielle DiMartino Booth, the CEO of Quill Intelligence said this raises alarm bells. She says that a similar stance four years ago led to market losses and this time around, could trigger a recession. She said, “I think that [a recession] could happen in a very compressed way because we have seen, as opposed to an economic recovery that stretches out over ten or 11 years, we’ve seen a very compressed economic cycle this time and the Fed has shifted from a loosening stance to a tightening stance in what feels like record time, so there’s absolutely no reason to think that the market will not start to anticipate the inversion of the yield curve and even more up expectations for when the economy slides into recession.”
Senior market analyst and respected gold industry figure Jim Wyckoff said that while gold may dip in the short term as a result of this policy, long term prospects remain very positive for the precious metal.
“The gold and silver markets are selling off sharply recently due to a tighter Federal Reserve (and other central banks’) monetary policies, after having been boosted by looser monetary policies for several years,” he explained. “Yet, the tighter monetary policies are being implemented mainly due to rising inflation fears. Historically, rising inflation has been bullish for hard assets like precious metals. My bias is that as inflation continues to bite, gold and silver markets will respond, overall, in a longer-term bullish fashion.
