Gold's Future Doesn't Rest on Wrathful or Merciful "Gods of the Fed." So, What Does it Rest On?
Mainstream says gold prices are driven by Fed rate policy. History says something quite different.
by Nico Isaac
Updated: March 02, 2023
The 2023 Academy Award picks for best picture are out! I just finished watching the film with the most nominations, "Everything, Everywhere, All at Once," and I must agree with the critics. This wild, fractured, etch-a-sketch erased-and-redrawn noir is a must-see IMO, and tells the story of a seeming average Jane (or Evelyn in this case) reluctantly realizing her fate as savior of the universe.
If this film were written from the perspective of mainstream finance, the savior of the economy, the ultimate power that is everything to all sectors, everywhere, all at once would be the U.S. central bank. Specifically, the Fed's interest rate policies.
Let's take gold, for instance. By this belief, loose monetary policies like rate cuts or tempered rate hikes are positive for gold, while aggressive rate hikes are negative. Ipso facto, on February 24, a well-known group of economists suggested the Fed is set to abandon its "gentle and forgiving" path of gradual rate increases for something more... Old Testament-aly. From CNBC on February 28:
"Recent developments suggest this gentle and forgiving path will prove unsuccessful."
"The risk of triggering a more wrathful Old Testament-style central-bank reaction is on the rise."
Thus, Wall Street pundits had no problem tying the recent landslide in gold prices -- in February, they suffered their worst monthly decline since June 2021 -- to said "wrathful" Fed. Behold:
- "Gold Dips with More Fed Rate Hikes on the Offing" (CNBC)
- "Gold Below $1600 vs. above $2000: It depends on Whether the Fed Breaks the Economy" (Kitco)
- "Gold Set for Third Weekly Fall on Hawkish Fed Worries... Prices touched their highest since April 2022 in early February, but soon reversed course. Bullion has fallen more than 6% so far this month after strong economic data boosted expectations of more rate hikes by the U.S. central bank." (Bloomberg)
This is where things get as disorienting as the plotline to "Everything... All at Once." Like, looking in a mirror seeing multiple reflections of yourself from various parallel universes staring back, kind of disorienting.
First: The Fed has pulled the rate-hike trigger 8 times in the last year, catapulting rates from near 0% to 4.75% in one of its most aggressive campaigns ever. If that's a "gentle and forgiving" path, then "wrathful" is unlike anything the modern world has ever known.
Second: Let's unpack the notion of the all-powerful, gold-moving Fed god via this chart of gold prices alongside the Fed's monetary policy since 2011.
You can see that from 2011 to December 2015, gold prices plunged 40-plus percent to 6-year lows. By mainstream logic, gold's freefall would have coincided with a hawkish Fed. In fact, it was the opposite: From 2011 thru November 2015, the Fed left interest rates at their lowest-ever level near .25-.0%, until it raised rates in December 2015.
In addition, "quantitative easing" lasted from 2011 thru 2014, as an estimated $4.5 trillion in stimulus was injected into the markets and economy. Said one October 30, 2013 CNN Business:
"Call it QE-Indefinitely. The central bank has been buying $85 billion in bonds every month since September 2012, and has said it will continue to do so until the job market improves "substantially."
"If these predictions come true, this round of QE is likely to total more than either of its two predecessors... There's still no end in sight for the Federal Reserve's stimulus program."
Conversely, consider December 2016 thru August 2019: gold was mostly higher on the way to a 6-year high. That's the sort of price action which suggests a dovish Fed -- right?
Nope! During this time, the Fed raised rates 8 times -- and QE had long been retired: (circa: Oct. 2014)
Next, November 2019 to July 2020. Gold's rally resumed, yet the Fed cut rates 5 times and pulled its stimulus program out of retirement with the quote "quiet" launch of QE4 in January 2020. But then, just as the dovish Fed-rising gold notion seemed to apply, we come to August 6, 2020: Prices peaked and the trend turned down, despite the zero-interest rate policy and trillions in new Fed stimulus.
Now, let's zoom in closer. After hitting the pause button on rate changes for 2 years, the Fed began hiking once again in March 2022. Since then, as mentioned before, it has raised rates 8 times in a limit-pushing style of the everything bagel-inventing nemesis Jobu Tupaki.
And what have gold prices done during that time? They've fallen, and risen, and fallen again in February for their worst monthly decline since June 2021.
Which brings us full circle to the tried-but-now-proven-untrue story of gold's February selloff being caused by a "wrathful" rate hiking Fed. In its place, we offer the Elliott wave interpretation of what's moving gold prices. Investor psychology unfolding as Elliott wave patterns directly on gold's price chart.
Here, on February 3 at 12:08 pm, our intraday Metals Pro Service update paved the way for a short and quick near-term decline in gold as a wave 4 correction:
"The outlook is bearish in wave iv (circled) while price holds under its 0.382 retracement level."
However, as the day progressed, a more sustained selloff warranted a revision of the wave count. At 7pm, Metals Pro Service altered its analysis to allow for a much larger decline in wave 2:
"The broad target for wave 2 is at least 1830.41 and potentially lower"
From there, gold's downside intensified as did our Metals Pro Service call for lower lows. February ended with prices below 1807.
Unlike the fake stunt work in "Everything, Everywhere All at Once," trading markets carries very real risk. And not all Elliott wave interpretations work out.
But the most promising methodology for identifying what's coming in the world's leading precious metals isn't watching the Fed. It's watching the Elliott wave patterns unfold right before your eyes.
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