In recent editions, we have pointed out that gold has risen during the Fed’s last three rate-rising cycles. We can now bring that story up to the last year the Fed raised rates, in 2018, with the market reaction.
At the first of this year, I predicted that gold would reach $2,200 and Goldman Sachs saw gold rising to $2,150. Most often prognosticators predictions were pessimistic. Goldman Sachs also sees the Fed raising interest rates SEVEN TIMES this year, from 0.25% to about 2.0%, so they know that gold can rise when rates rise, but history shows that when the Fed raises rates too far, gold can soar while stocks collapse. In 2018, the Fed’s fourth and final Fed Funds rate increase came on December 19, 2018, and it sent the stock market down rapidly, while supercharging the precious metals. Gold rose from $1,246 the day before the rate increase of December 19, gaining $35 per ounce (+2.8%) to $1,281 by year’s end, while stocks fell.
This could happen again this year, too, if the Fed went too far in raising interest rates.
Russia Has Stockpiled More Gold Than Any Other Nation Since 2010 – Since They Know Gold Provides “Ultimate Value” (and Anonymity)
Back in December 1979, Russia invaded Afghanistan amid high and rising inflation, and that act pushed gold from barely $400 to $850 within a month. One untold story of Russia’s invasion of Ukraine last week is that Russia has been stockpiling gold regularly over the past decade – like no other nation – even though it is a relatively poor nation, not much richer than Spain. They likely did this since they probably knew gold would soar after their aggressive actions, offsetting any possible loss in future energy sales.
In 2010, gold represented only 7.4% of Russia’s official foreign exchange reserves. By 2019, that share had more than tripled to 23.4%. They funded this by unloading their U.S. dollar holdings.
This gold purchasing program has pushed Russia’s gold hoard to the #5 position in the world, not far from #3, behind only the U.S. and Germany. Russia now holds 2,300 metric tons of gold, according to the World Gold Council (WGC). At today’s price, that’s about $145 billion, which equals about 10% of Russia’s GDP. Gold is fungible everywhere. This stockpile, if sold to a Russia-friendly country like China, could also help offset, or make moot, any monetary sanctions put on the country by the U.S. or NATO following its invasion of Ukraine – at least in the short term.
Where We Stand After Two Months of 2022
All of the precious metals are in positive ground after just two months of the New Year. With approximately 5% gains – and even more after March 1 – the major stock market indexes are down an average of 8%, and even more after March 1. And the indexes sank further on the increasingly fearful news coming out of Ukraine, on Tuesday, following President Biden’s State of the Union address.
In the first two months of 2022, U.S. Mint sales were down (year over year) for the American Eagle gold and silver coins – down 21.7% for Gold American Eagles and down 18.4% for Silver American Eagles. This is partly due to the fact that 2021 was a banner year of sales growth for the Eagle pattern design change, but American gold Buffalo one-ounce coin sales rose 65.6% in February vs. February 2021, partially offsetting lower Eagle sales.
Long-Term, Gold Will Rise Based on Soaring Debt and a Dollar Devaluation
Inflation will come and go. It is rising now. It will eventually come back down but debt will keep rising and it will eventually be either repudiated (through non-payment) or be purposefully “devalued” through a process called “monetization,” or printing more money to pay the debt.
Columnist George Will wrote about debt last month, commemorating the sad fact that the U.S. had just passed the $30 trillion national debt mark – after passing the $25 trillion mark less than two years ago.
It’s almost impossible to imagine a number that big but in human terms $30 trillion amounts to about $90,000 in debt for each American or $360,000 for a family of four. On a national scale, each 0.25% increase in the Fed funds rate amounts to a $75 billion increase in the cost of servicing the federal debt, so if the Fed enacts four 0.25% rate increases this year, that will cause a $300 billion cost increase for nothing more than writing checks to big banks, foreigners and rich investors who hold Treasury notes.
Will stated, “An average rate of just 5% — which Washington was paying in 2008 — combined with merely modest new federal spending, would push the debt toward 300% of GDP in three decades.” Today’s federal debt equals 100% of GDP, or 161%, if state and local debt is included. And aging Baby Boomers, with fewer younger workers, will also push Social Security and Medicare toward bankruptcy.
Will concludes: “Even an interest rate of just 3 percent on debt at 250 percent of GDP would siphon up approximately 40 percent of tax revenue. Inflation amounts to repudiation, paying debts in devalued dollars, and as debt increases, so does the government’s incentive to choose inflation.” I choose gold!