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With this Recession Express article, we see that the $50/ounce decline in the price of gold last Friday came as a terrible shock and appeared out of nowhere. In actuality, it served as a stark reminder of the influence that the Federal Reserve, the US central bank, indirectly had over the price of gold.
Although the week was very busy, most of the major news stories were well-known in advance. As was widely anticipated, the Fed increased its benchmark interest rate by 0.25% on Wednesday, bringing it to a range of 4.5%-4.75%. The US Bureau of Labour released information on Thursday indicating that the economy added 517,000 jobs in January, double the number seen in December. Most economists were caught off guard because they had anticipated about 185,000 new job vacancies. 3.4% is the lowest unemployment rate in the US since 1969. Additionally, there were 11 million more job postings in January, and unemployment claims are at their lowest level in nine months.
These numbers demonstrated a number of financial market grenades. They’ve veered away from the path the Fed appeared to be taking, which was a plod towards peak interest rates of about 5% by the end of 2023.
Some economists come to the conclusion that reduced unemployment and slower pay growth create a “utopian scenario” in which consumer demand remains high and inflation is curbed. However, it’s equally probable that in their profound anxiety about the state of the US economy, politicians will make a mistake and find themselves in a dystopian situation.
The Temptation
The US economy is still humming along, according to the January jobs data, despite the Fed raising the cost of credit and money. The Fed’s job includes ensuring price stability. To that end, it has increased interest rates eight times since March 2022 in an effort to combat inflation, which recently hit a four-decade high of more than 9%. Current rates are the highest since October 2007. Higher rates often result in a stronger Dollar and a weaker gold price expressed in terms of dollars; on Friday, the Dollar increased by over 2% while gold fell. “Stable prices” signify that inflation is under control; in December, the US consumer price index (CPI) was annualised 6.5%, the lowest level in a year but still much more than the Federal Reserve’s objective of 2%.
The reason the gold price responded so negatively to the jobs news was not that gold needed higher unemployment, but rather due to concern that the Fed may raise interest rates more quickly than anticipated, strengthening the Dollar and making gold (which bears no interest) less appealing. The Fed is tempted to misread the data, draw the incorrect conclusion that the economy is humming along and that inflation is still a concern, and then raise rates even further.
On this, Fed policymakers appear divided, with some advocating for higher rates (to finally put an end to inflation) and others calling for a slowing of rate hikes (for fear of putting the economy into a serious recession with all the associated miseries). It’s “high noon” for central bankers, according to some pundits, if they stop interest rate increases too soon or too late, which will keep inflation alive but not precisely kicking.
Recession Express will bring Stagflation for some
At least the Fed is faced with a clear option if the US’s path to monetary stability remains unclear. In the UK or the Eurozone, this is not the case.
Last week, some British lawmakers blasted the International Monetary Fund (IMF) for its pessimistic assessment of the British economy, which it predicted would contract by 0.6% this year, placing the UK below the G7 group of wealthier countries and, humiliatingly, Russia.
Yes, it is unusual for central banks to raise interest rates in the face of a slowing economy, as it can put further downward pressure on economic growth. Typically, central banks lower interest rates in a slowing economy to encourage borrowing and investment, which can stimulate economic activity. However, in some cases, central banks may raise interest rates to combat inflation or manage other economic or financial risks.
The Bank of England and the European Central Bank may have decided to raise interest rates for various reasons, such as concerns about rising inflation or to prevent the economy from overheating. Inflation can erode the purchasing power of people’s savings and wages, so central banks aim to keep it under control. Additionally, an overheating economy can lead to asset bubbles, financial instability, and, ultimately, a financial crisis.
In the case of the UK and the Eurozone, the central banks may have seen evidence of rising inflation and decided to raise interest rates in order to bring it under control. However, it’s important to note that central bank forecasts are not always accurate, and there are many factors that can impact the economy in unpredictable ways.
The UK economy was expected to increase by 0.9% in 2024, according to the IMF, while the Bank of England (BoE) predicted a further decrease of 0.25%. The IMF predicted that the gross domestic product (GDP) of the Eurozone, which had a 0.1% increase in the last quarter of 2023, would climb by 0.7% this year and 1.6% in 2024. The BoE raised interest rates last week to 4%, a 14-year high, while the European Central Bank (ECB) did the same, raising rates to 2%. It is rare, to say the least, for interest rates to be raised when the economy is slowing down.
Economic predictions frequently prove to be inaccurate; the further in the future they are projected, the more likely it is that they will be wrong. At this moment, the most any crystal ball gazer (i.e., all economists) would likely say if they cared about their reputation is that all of the IMF estimates are within a reasonable range of possibility.
Yes, that is correct. Economic forecasts, especially those looking several years into the future, are subject to a high degree of uncertainty and are often revised as new information becomes available. The accuracy of these forecasts depends on many factors, such as changes in government policies, unexpected events, or shifts in consumer or business behaviour.
It’s important to note that economic forecasts are not predictions but best guesses based on current information and trends. They can provide a valuable guide to policymakers, businesses, and individuals but should not be relied on as gospel. Additionally, even if the forecasts are accurate, the actual outcomes can still vary significantly from the forecast, particularly in the case of unexpected events.
In conclusion, while economic forecasts can be a valuable tool for understanding the future direction of an economy, they should be taken with a grain of caution and understood to be subject to significant uncertainty.
The UK is facing enormous rocks. Many more people are joining the teachers, nurses, and firefighters on strike to seek wage hikes that keep pace with inflation on behalf of workers in the public sector. Despite the trade unions’ diminished power, the Centre for Economics and Business Research estimates their strikes cost at least AUD3.0 billion in the first eight months of last year (CEBR). There are no indications that the government will modify its offers of (sub-inflation) wages.
These three are not, however, out of the woods yet. The IMF’s growth projections are absurd. The “actual” economy doesn’t experience increased interest rates for several months. Thus the Fed might quickly go too far and raise rates to the point where a recession occurs in late 2023. Before June, the US must negotiate a solution to its problematic debt ceiling ($31.4 trillion). In Britain, the strikes are an unsettling inconvenience, but one can understand the workers’ plight because their living standards have dropped well behind inflation. This year’s high energy costs may not have affected the Eurozone, but next year could be different.
Then there is Ukraine, which the West is pouring money into and is currently on the verge of a direct military conflict with Russia. Ukraine is a bottomless pit. Tanks are on their way to Ukraine. After that, fighter jets? A row of this nature would be disastrous for people and paper money. One may observe what social and political tragedy can do to a fiat currency and what human suffering results by looking at Lebanon, which just depreciated its currency, the Lebanese Pound, by 90%. We live by the adage, “Gold is security.”
Disclaimer
PWD Media Owners or its employees are not registered investment advisors and do not provide financial advice. Comments on this page are only an expression of opinion. While we attempt to illustrate the potential benefits of investing in precious metals, remarks, links, or advertising on this website should not be interpreted as advice to purchase or sell a commodity at any time. While PWD Media makes every effort to ensure that all of our comments are genuine and correct, we employ third-party data and rely on our reputable sources’ credibility. Before making any investment decisions, PWD Media suggests you contact a knowledgeable investment advisor.
Securities disclosure.: I, Beat Süess, have no direct investment interests in any of the companies mentioned in this article.
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3 Responses
Thank you so much for the article, it was very helpful and useful too.
I am looking forward to your next one, cheers 🙂
Thanks, Eric that is very nice you liked the Article, please come back for more reading anytime.
Hi Eric, I wanted to take a moment to express my gratitude for taking the time to read and comment on my recent article. Your feedback and insights were helpful. I appreciate how you shared your perspectives on the topic. I hope to dive deeper into the subject in future Articles. Your comments have made my day. It’s readers like you who make my work meaningful and fulfilling. Once again, thank you for your valuable contribution to the discussion. I hope we can continue this conversation and engage in more thoughtful exchanges in the future.
Best regards, Beat