Get ready for lower interest rates as Fed loses its nerve

As the Federal Reserve signals it is moving closer to cutting rates, the gold market is moving closer to hitting a new record.

On Thursday, the monetary metal catapulted back above the $2,400 level, trading about $25 shy of a new all-time high. Meanwhile, silver is following its nice midweek gains by giving back a portion of that today. 

We saw something of a bifurcation take place in metals markets yesterday as the platinum group metals, along with copper, fell. Meanwhile, the monetary metals, along with mining stocks, rose.

At the same time, equity investors dumped shares of high-flying market leaders including Nvidia. The tech-heavy Nasdaq lost 2% on the day.

Investors may be concerned that recent signs of a weakening job market and softening manufacturing activity could point to trouble ahead for economically sensitive sectors. Of course, Wall Street perma-bulls will interpret bad news on the economic front as good news for markets because the Federal Reserve will be more inclined to cut interest rates.

Comments from Fed chairman Jay Powell and a host of other current and former central bank policymakers this week suggest a rate cut could come in September.

Central bankers feel encouraged by Thursday’s Consumer Price Index report.  That particular measure of inflation eased in June, with the CPI coming in at an annual rate of 3%. That’s a significant improvement from the 3.3% reading in the previous month’s report.

It’s still a long way from the Fed’s stated target of 2%. But Chairman Powell reiterated this week that he doesn’t need to see the 2% target hit before cutting rates. All he needs is to see some progress toward the objective and then project that progress neatly and conveniently into the future.

Whether inflation as the government calculates it ever actually does go down to 2% on a sustained basis is another question. Powell doesn’t know the answer to it. But that won’t stop him from making arbitrary projections about inflation continuing to come down even after he starts cutting rates.

Maybe he’ll be right this time. But the Fed does have a history of getting things wrong when it comes to things like forecasting what the economy will do.

Central planners imagine that they know more than what the market knows at any given time. They imagine that their interventions can produce better outcomes for the economy than if it were left to its own devices.

The truth is that not even a group of the most brilliant economists in the world could devise a formula for determining what the inflation rate will be a year from now or when the next recession or financial crisis will hit.  No one knows what the optimal interest rate is at any given time.

In assuming the role of setting short-term rates for the entire economy, the Federal Reserve has prevented market forces from balancing all the factors the Fed supposedly weighs – along with others that central planners may be overlooking. Instead, market resources have been misdirected from responding to real factors in the economy to responding to decrees from central bankers.

Trying to predict the Fed’s next policy move or properly interpret the latest Fedspeak verbiage has become the biggest game on Wall Street.

Investors who hold gold and silver do so in part because they distrust the Fed. They don’t think central bankers have the ability to see the future or the willingness to genuinely pursue their mandate of price stability.

Precious metals investors also tend to be humble enough to admit that they are uncertain about the future. That’s why they hold core positions in bullion regardless of prevailing market conditions.

Though often derided as “doom and gloomers” by Wall Street cheerleaders, most hard money holders own financial assets as well. They just don’t like the idea of having 100% exposure to the risks inherent in the financial system.

Some people who own gold and silver are also bullish on the stock market. But they know that a bullish trend can be upended at any time by black swan events that no one saw coming.

Investors who want to be financially resilient in uncertain times should be well diversified into a mix of asset classes, including physical precious metals held outside the banking system.