Recipe for Higher Gold Prices: Cutting Rates and Rising Oil

Recipe for Higher Gold Prices: Cutting Rates and Rising Oil by Nathan McDonald for Sprott Money

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As expected, the Federal Reserve, led by Chairman Powell, cut interest rates for the second time since July of this year, signalling their belief that the markets as a whole remain unstable and the future unpredictable.

By cutting interest rates another quarter point, the Federal Reserve has once again thrown a bone to the markets, even if it was much smaller than Wall Street wanted.

However, this was once again not a unanimous vote within the Fed, as many board members expressed concerns and vented their displeasures with the current direction.

As reported on Zerohedge:

“The Fed has never been more divided: 7-3 vote to cut; Esther L. George and Eric S. Rosengren voted to keep rates unchanged; Bullard voted for a 50bps rate cut (guaranteeing him the job over Kashkari when Trump fires Powell); 7 FOMC members predicted another cut this year, while 10 say hold or raise.”

This dissension within the ranks did not stop Fed Chairman Powell from pushing forward, however, as it appears that he is attempting to meet both his board members and the markets in the middle by offering a minor cut in rates, but not the deep slash that some wanted.

Following these cuts, Mr. Powell stated the following:

“There may come a time when the economy weakens and we would then have to cut more aggressively,” he continued. “We don’t know. We’re going to be watching things carefully, the incoming data and the evolving situation.”

It is incredibly likely that this move will be mirrored by other countries around the world, such as Canada, as the currency wars continue to unfold and participants partake in the merry-go-round of ever lower rates.

As it stands today, the Fed’s policy interest rate is now set in a 1.75 to 2 percent range, with Powell stating that he sees no further cuts this year unless markets significantly worsen.

Immediately following this news, markets across the globe fell. However, it was short lived, as they quickly bounced back.

Venting his frustration with the Federal Reserve yet again, President Trump, as always, took to Twitter:

“Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”

President Trump would like to see interest rates cut to zero, or even enter into the negative territory such as the European Central Bank has done, believing this would make the United States that much more competitive in the global markets. Savers and the currency be damned.

Despite the Fed’s claims that no more rate cuts are coming in the near future, I believe that there is a high probability they will once more capitulate to the demands of the markets and lower rates again.

I am not alone in this assessment, as many market analysts believe that more rate cuts are coming in the near future, with the odds strongly indicating another rate cut by December 2019.

This is especially likely if the price of oil continues to tick higher in the coming months due to the recent hostilities in Saudi Arabia, which suffered an attack on their oil infrastructure from an unmanned drone.

This caused the price of Brent crude to spike by a stunning $12 per barrel, as 5% of the world’s total oil supply was shut off overnight, highlighting how fragile and interconnected our modern global economy is.

Fortunately it appears that, for now, cooler heads are prevailing, which has caused oil to stabilize slightly lower (although still higher than pre-attack levels).

Once again, $100 per barrel oil is a very real and scary possibility.

Anything could change overnight, tensions could once again flare, and Federal Reserve Chairman Powell would be forced to change course, slashing rates even lower to help stave off a recession caused by runaway energy prices and inflation.

If this happens, gold and silver will spike higher—much higher—as they have been historically tied to the price of oil, also known as “black gold”.

In addition to this, if the Fed lowers rates in response to rising oil prices, we will have a “double whammy” effect, pushing precious metals even higher, possibly even testing old highs.

For now, sit tight and prepare accordingly, as we truly do live in scary, yet interesting, times.

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Sprott Money

Various authors presenting analysis and commentary on the precious metals, economy and precious metals mining markets.