Historically, a Federal Reserve shift from interest rate tightening to a neutral stance has boosted the price of gold, although the effect has not always been immediate, according to a report released by the World Gold Council this week.

It wasn’t long ago that the Fed was talking about multiple rate hikes in 2019 and balance sheet reduction was on “autopilot.” But all of that changed when the stock market started tanking last December. Now we have the “Powell Pause,” and an apparent end to balance sheet reduction on the horizon.

According to the WGC, it seems likely the central bank will keep interest rate increases on hold for the rest of the year and that will influence gold’s performance.

“In our view, the combination of rangebound US interest rates, a slowdown in the appreciation of the US dollar and continued market risks will continue to make gold attractive to investors.”

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The WGC report says previous research highlights the fact that interest rates have a bigger impact on asset price performance — including gold — when there is a shift in policy stance (e.g. from neutral to tightening or vice versa).

“Our analysis of gold’s performance in January suggests that, indeed, expectations of interest rates are starting to play a more influential role than they did in 2018.”

(Photo by Виталий Смолыгин / CC0 Public Domain)

The historical analysis shows that the price of gold does not always react in the early months of a policy shift. When the Fed transitioned from tightening to neutral and then to easing in 1999-2001, the price of gold fell in the first three months, but then showed 3.6% returns over 12 months. Post tightening cycle returns between 2004-2007 were more immediate, with a 7% return in one month, a 13.1% return over three months and an 18.8% return over 12 months.

“While no clear evidence points to an immediate positive impact on the price of gold after the Fed pauses, historical analysis suggests that gold eventually reacts positively as the pause cycle extends and/or the Fed eases monetary policy. Historical post-tightening periods have shown an eventual strong gold performance, counterbalancing the performance of risk assets such as stocks or commodities, and complementing – sometimes even outperforming – assets such as Treasuries and corporate bonds.”

Peter Schiff has been saying the pause won’t be enough and the Fed will have to shift to interest rate cuts and another round of QE in the relatively near future.

“They don’t want to admit the real problem is in America. We can’t raise rates because we can’t afford it – because we have too much debt thanks to the Federal Reserve because they kept interest rates so low for so long, we borrowed so much money that it’s impossible to normalize interest rates because we have an abnormal amount of debt. The reason they have to stop shrinking their balance sheet is because they can’t do it because the budget deficits are exploding and they can’t add to the problem by shrinking its balance sheet. And what Powell hasn’t said is that by the way, what we’re going to have to do is go back to quantitative easing because the deficits are so big and air is coming out of this bubble we’re going to have to buy even more bonds, the balance sheet is going to get a lot bigger. In fact, we’re going to have to cut interest rates back to zero. They haven’t let that cat out of the bag yet.”

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