Thursday, September 21st, 2017 MST

The Fed is trapped

At the Houston Mises Circle January 30, I sat on a panel and was asked how I saw the gold and silver markets doing in 2016. Basically, I said that metals prices hinged on what the Fed does with interest rates and with how the stock market reacts.

As I’ve written here before, the world has embraced Keynesian economics, complete with its advocacy of massive money creation to stimulate economic activity, as was attempted with the Fed’s QE programs. Now, the European Central Bank is about to start buying bonds with newly created euros to fillip economic activity in the eurozone.

In Japan, quantitative easing has become the norm, but the economy has not responded as hoped. So, Friday the Bank of Japan announced negative interest rates, with the theory that banks need to lend more freely.

China, in an effort to halt the economic the slowdown that has all the world shaking, instituted a loose monetary policy. The Bank of England is hesitant about raising interest rates after having sent signals it would do so.

Now, economists are rethinking their position that the Fed will boost interest rates four times in 2016, as previous thought when rates were hiked .25% in December.

There is a growing fear that the US economy–considered the world’s lone engine of economic growth–is on the verge of recession. A Financial Times poll of 51 “leading economists” now puts the chance of a recession in the US at 20%, up from 15% in December. A prominent fear is that many oil companies may go bankrupt because of the plunge in the price of oil.

If the Fed indicates it may re-think its position on hiking interest rates, stocks and the metals should see higher prices. Both are running on fiat money, although the fear of a worldwide financial meltdown is the motivation of many metals buyers.

The Fed is trapped. If it sticks with higher rates, stocks will suffer (already down 8% this year), and that should drive many investors to gold and silver. If it backs off, stocks may rebound. Either way the metals are looking good in 2016.

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