Predictions: Gold, The Federal Reserve, And The Dollar

Thursday, May 26, 2016

With gold coming off a difficult week - only recently was its downward streak snapped - it’s clear that things have been slowing down for the precious metal. This is particularly due to a stronger dollar. And, with the Federal Reserve showing signs of flirting with a rate increase come June - having initially projected some four rate hikes this year - many gold investors are worried that the yellow metal may drop to $1,100.

But let’s step back for a moment and ask ourselves about the consequences of what’s currently going on in the gold markets.

We know the following:

  • There are plenty of whispers of a Federal Reserve rate hike coming in June, but nothing definite yet.
  • Russia and China’s banks seem undeterred; at least, they did in April, and were still adding to their gold reserves.
  • A Federal Reserve rate hike would likely mean a stronger U.S. dollar for the short-term, which in turn means that gold could continue to fall to lower prices.

What don’t we know? Just about everything else. Janet Yellen, the chairperson of the Federal Reserve, is not the one fanning the flames of rumors about a rate hike. It may be that some people within the Federal Reserve system (such as local bank heads) believe that a rate hike should be made and that it’s, therefore,  in the cards. But, ultimately, it may come down to Yellen’s opinion.

The Future For The Dollar, And For China

Jim Rickards, one of the most infamous gold bulls around, believes that the Federal Reserve appears to be testing the waters here and that the potential consequences of a rate hike could make such a decision far less attractive than many people think.

Talking to RT, Rickards points out that the regional reserve bank presidents don’t have the power that many people think they do when it comes to actual rate hikes. “This is all an expectation game…We’ll see what happens in June, but I don’t put a lot of weight on [regional presidents’ opinions],” Rickards said.

When asked about the strength of the U.S. economy, Rickards was quick to point out that employment rates aren’t what they appear, either. “It’s nowhere near full employment,” he said, thanks to labor participation rates and how many of the jobs are part-time jobs.

Perhaps Rickards’ most interesting opinion was about currency manipulation. “The problem is if the US raises rates, you’re going to strengthen the dollar, and the Chinese will unilaterally devalue,” said Rickards.

If the Federal Reserve keeps this in mind, then June’s rate hike could come down to a coin flip, from an outsider’s perspective. Even though there are strong indications that some in the Federal Reserve see this rate hike coming, the consequences of a rate hike might be a little more difficult than they’re letting on. In other words, don’t be surprised to see rates stay the same, despite bullish opinions of those in the Federal Reserve. And if this is the case, gold may remain stagnant for some time before economic conditions change - which means that if you believe in gold’s long-term future, you have an opportunity window, now, to buy - just as Russia and China continue to do.

Darren Capriotti

Darren Capriotti has been a market analyst for the past decade and is an expert in precious metals. He prides himself on his ability to analyze the market and offer true value to investors with questions about gold, silver, and other precious metals. Highly educated, incredibly passionate, and more accurate than most, Darren offers a true, unbiased look into what investors can expect in the precious metals market. You can reach Darren at dcapriotti@gold-eagle.com.