25 Point Hike Hits Gold Now; Increases Investment Value for Future

Despite numbers that show industrial production suffering its biggest drop since the spring and retail sales nearly flat-lining, the United States Federal Reserve raised interest rates by 25 basis points and signaled more of the same to come in 2017-2019. Fed Chair Janet Yellen herself expressed concerns about low productivity growth, while other economists raised the hope that the numbers would be revised upward by January or show a reverse.

The December increase, coming an entire year after the last rate hike (the first by the Fed in over 9 years) and promises to do the same throughout 2016, is justified by large jumps in the costs of services and producer items. Inflation is expected to go up steadily toward 2 percent. If it rises more quickly, it would indeed set the stage for the suggestion that more interest rate increases are to come. If the new Trump administration carries through on its election promise to pour government funds into the economy through infrastructure funding, this would also be a significant contributing factor.

Just the Beginning

No doubt taking the above factors into account, the Fed is forecasting three rate hikes in 2017 (up from its September prediction of two), and as many as three in each of 2018 and 2019. The Federal Open Market Committee (FOMC) made assurances that these increases would be “gradual” while observers term the blueprint as “ambitious” and even a bit surprising. FOMC members likewise point to the expected achievement of “full employment”, a rate of 5% that takes into account cyclical jobs and labor movement. The attainment of full employment (in theory) drives prices up, triggering inflation which is “cooled” by higher interest rates.

President-elect Donald J. Trump, in addition to regularly expressing hostility to the Fed and Chair Yellen, rejects the full employment concept as not an accurate depiction of reality in America today. Recently, he told Fox News interviewer Chris Wallace, “…look at the real jobs report, which are the millions of people that gave up looking for work, and they’re not considered in that number that’s less than 5 percent…” Mr. Trump, until his inauguration and perhaps further, remains the elephant in the room. How rapidly will he move on a possible 1 trillion dollars of infrastructure spending? The stage is set, and nobody knows how it will play out.

A more pertinent question for you is: What does it all mean to the gold investor?

The Take-Away

The price of gold, predictably, sunk upon the rate increase announcement. Almost immediately, it went to a ten-month low. Futures for silver, platinum and palladium, however, showed increases. It is interesting to note that, when interest rates rose in October 2015, the price of gold fell strongly, only to rebound even more vigorously in the weeks afterward.

A quarter-point increase in the interest rate will make little difference to the money-saving investor. Indeed, the banks may not pass on the increase to its customers at all. The Fed is predicting three rate hikes in 2017; last December, it predicted FOUR increases in 2016 and came away with one.

Uncertainty remains the operative word in describing these economic circumstances, with a very different administration entering the White House. Much remains to be seen, and analyzed within the big picture of the world and U.S. economy.

It is critical to remember that the current lower prices make gold a bigger bargain than it already is, a position strongly held by one of the world’s foremost asset management experts, Egon von Greyerz (a board member of Goldbroker.com). Mr. von Greyerz calls gold the cheapest insurance that you can buy. Right. Now.