November 9

Interest Rates Hit Pause: Gold’s Time to Shine?

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After a period of historically aggressive rate hikes, the Fed has again hit the pause button, opting to hold rates steady for a second consecutive meeting. Federal Reserve Chair Jerome Powell cryptically explained, "Slowing down is giving us, I think, a better sense of how much more we need to do if we need to do more." 

Of course, investors are parsing his words for a hint of what's to come, but despite the Fed’s poker face, the markets seem to know what’s coming- unchanged rates through the rest of the year. Treasury yields have dipped to their lowest in weeks. The tech-centric Nasdaq Composite index surged over 1% in consecutive days following the Fed’s announcement, suggesting a belief that the era of tightening may be drawing to a close. The CME FedWatch Tool echoes this with its latest projections.

So where does this leave gold? To put it mildly, many think in a strong position. 

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The Federal Reserve's Deliberation

Given fluctuating economic data and the still-sticky inflation, the Federal Reserve’s decision to keep interest rates unchanged had many people talking. 

Behind the Decision to Hold Rates Steady

Understanding the context of this decision requires a deep dive into the nuances of economic trends and the Fed's interpretation of these signs. The Fed's choice to pause interest rate hikes comes after a period marked by aggressive increases aimed at tempering inflation.

Yet, Federal Reserve Chair Jerome Powell's recent address suggests a strategic inflection point. Powell's comment about "slowing down” during the press conference introduces a cautious contemplation narrative. It reflects a balancing act between the desire to normalize economic conditions and over-tightening risks.

Historical Trends and the Significance of the "Dot Plot"

The "dot plot" of the Federal Reserve, which graphically indicates where committee members think interest rates could head, had once signaled another rate increase in 2023, a consensus during the September Economic Projections.

But Federal Reserve Chair Jerome Powell has recently thrown a curveball, undermining the certainty of this forecast. His hesitancy to endorse the predicted path suggests a market sensitive to even minor fluctuations in interest rates, where a small adjustment in expectations can send significant ripples across the financial landscape.

In a tightrope act of communication, Powell further muddied the waters. When pressed about the longevity of high rates implied by the Economic Projections, he hinted at their short shelf life, focusing on "efficacy decays" as time moves from one meeting to the next.

This candid acknowledgment speaks to the fluid nature of economic forecasting and the necessity for the Fed to remain agile. This nuanced stance has had a palpable effect, with the probability of a rate hike by year's end, as measured by the CME FedWatch Tool, dramatically dropping from 54% to 20%.  

Related: How to Diversify Your 401(k) with Physical Gold (Free Guide)

Other Indicators That Rate Hikes Are Coming to an End

Peeling back the layers further, we find other indicators signaling the end of rate hikes: treasury yields, the Nasdaq, and expert analyses.

Treasury Yields 

In finance, Treasury yields are often seen as the economy's pulse, offering vital signs of fiscal health. Recently, this pulse has been slowing, with yields hitting their softest levels in two weeks.

This drop is more than a mere fluctuation; it's a whisper of market sentiment, hinting that investors may anticipate the end of the Fed's rate hike cycle. As yields fall, the cost of borrowing becomes cheaper, potentially spurring investment and spending—but also reflecting a cautious stance on future economic growth.

The Post-Pause Nasdaq Pop

The tech-heavy Nasdaq Composite has also been telling its own story, with movements that defy economic uncertainty's gravity. Climbing over 1% for two consecutive days, the Nasdaq has been buoyant, possibly propelled by the same whispers that calmed the Treasury yields. This rise is a barometer of investor confidence, suggesting that the fear of further tightening by the Fed might be receding, giving way to a more optimistic outlook for tech growth and earnings.

Expert Views 

Mark Zandi, Chief Economist at Moody's Analytics, is part of a growing consensus suggesting there may be no further rate hikes for the rest of the year. Whitney Watson of Goldman Sachs Asset Management concurs, projecting steady rates due to the economy's resilience, which hasn't upset labor market balance or reignited wage and price pressures, indicating a move towards ongoing disinflation and implying the Federal Reserve keeping its current policy into 2024. The markets' upbeat response to Powell's press conference supports this view.

Below: Avenue Capital's Marc Lasry believes we've seen a peak in interest rates.

Click to play

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Where Does This Leave Gold?

As the Federal Reserve holds the line on interest rates, a wave of reactions sweeps through the markets, bringing predictions and expectations. This financial saga not only grips the world of fiat currency and equities but also casts a spotlight on a much older form of wealth—gold. 

Historical Perspective on Gold's Response to Interest Rate Changes

Traditionally, gold has worn the mantle of a safe haven asset, often moving inversely to interest rates. During rate hikes, gold prices have historically tended to soften. Higher interest rates increase the opportunity cost of holding non-yielding assets like gold, leading investors to seek yield-bearing alternatives.

Conversely, when rates are steady or declining, gold regains its appeal, attracting investors looking to hedge against the erosion of currency value and the crushing blow of inflation.

Related: Gold Amidst Chaos: How Israel-Hamas Conflict Impacts the Precious Metal

How Steady or Lower Rates Could Affect Gold Value

With the Fed's rates steady and the market forecasting a pause in hikes, gold could have immense potential. Stable or lower interest rates typically bolster gold's appeal, as they tend to coincide with a weaker dollar and lower bond yields.

For instance, on the day that Powell kept rates steady, gold prices broke past the $2,000 level as the U.S. dollar and Treasury yields slipped after weak U.S. jobs data cemented expectations of the Fed's rate hiking pause. Many industry experts appear bullish, too. Sean Casterline of Delta Capital Management suggests the current economic malaise could signal gold's climb. 

He mentions geopolitical tensions and the 2024 U.S. presidential election as additional factors. Meanwhile, Alex Ebkarian of Allegiance Gold anticipates expansive fiscal policies reigniting inflationary pressures. At the same time, Collin Plume of Noble Gold Investments predicts gold will surpass its all-time high of $2,074 in 2024, potentially reaching beyond $2,100, with government and industrial demand supporting this rally.

The Key Takeaway

As the Fed presses pause on rate hikes, the spotlight swings to gold, historically a sanctuary in uncertain times. With markets signaling the end of rate increases and experts predicting a bullish future for gold, investors are watching closely.

The precious metal's fate, intertwined with economic forecasts and geopolitical shifts, holds a particular intrigue as we approach 2024. Will gold continue its ascent as the safe-haven asset it is? Only time will tell, but the signals certainly point in its favor. 

Don't let your savings fall victim to geopolitical or economic uncertainty. Request your gold IRA kit to learn how precious metals can help diversify your retirement savings or investment portfolio.

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About the author 

Robert Samuels

Robert Samuels is a financial copywriter and business advisor. After teaching himself stock market basics and financial fundamentals, he leveraged this newfound passion into a Master’s Degree from Harvard University’s ALM Finance extension program, where he received a 3.87 GPA and Dean’s List distinction.

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