Gold's Performance after Wednesday's FOMC meeting

It was the dot plot. It all has to do with expectations for rate cuts in 2024.

As expected, the Fed did not alter its current Fed Funds target rate of 5.25-5.5%. So why did gold sell off from about $1947/oz before the meeting to as low as $1914 early the next day? Expectations for rate cuts during 2024. FOMC members are always given their expectations which is given on a "Dot Plot". Clearly those members have shifted their thinking that a recession is less likely in 2024 and perhaps they can pull off a soft landing. Here are the dot plots for the June meeting and the September meeting 2023.

What do you notice in the two charts above? Note how the 2024 Fed Fund rate expectation shifted higher? That was enough to send gold down $30. The Fed always maintains that it is "Data Dependent". However, it is all backwards looking. I will give credit to the Fed for driving down inflation but they are going to create a recession. And the soft landing idea far fetched. The idea that they can slow down inflation with the record breaking interest rate increases last year and NOT cause a recession are likely fanciful. They Fed has never succeeded at this before, but they somehow think "this time is different.  Consumers are pulling back pretty hard right now and raising cash. We have seen that in the gold business in which I am a part owner and other anecdotal evidence from other small businesses is piling up. People are selling assets and the labor markets are softening dramatically.

But its not all bad news. I would have expected more selling of gold since that announcement, but gold has recoved to about $1925/oz. So that begs the question. Was the small (relatively) sell off after the dot plot publication just a knee jerk reaction from the algos? Are the human traders on Wall Street taking back the narrative and bidding gold higher with an eye on a "soft  or no landing"?  We think so, but we also think that rates are likely to head down quicker than the dot plot indicates. Because barring a miracle, we are headed into a recession. Fed officials are inherently backward looking and the economy is headed to a recession but they just don't believe it yet. We will also gove the Powell led Fed much more credibiliy on being independent than the politically motivated Yellen Fed. 

They want to labor markets to soften and they will get it. It's a separate discussion for a future post on whether that will create even more hardships for the hard working Americans that actually produce something, because it will. Real wages couldn't keep up with inflation last year, and they will certainly continue to lag, making end meet even harder. At least that is what we think.  It will also likely be much harder to strengthen the labor markets once they have softened. We have no idea how high the unemployment level is likely to head, but 6% seems like a low number over the course of the next 18 months. It's too bad we don't have an American version of Javier Millei as a candidate for President. He or She could clean up this economic mess brewing in short order.

When the Fed does start cutting rates, expect them to cut a lot faster than they currently expect. Also, don't be surprised if they switch back to quantitative easing (i.e. money printing) from their current quantitative tightening program. Inflation is almost certainly going to come storming back once they do. A giant reset might be in our future. Sooner than most people think is possible. Gold will shine when this happens. There are just too many bad decisions being taken by both the governments around the world, led by the US along with the central banks to prevent not only  a recession or a giant monetary reset.  I hope I am around for it as I suspect we, as a nation, will return to sound money policies afterward. Sound money is the bedrock of prosperity. 

Dan Barrett is the Chairman of Pacific Precious Metals and the Founder of the Aureus Point-of-Sale system, a software platform made for bullion and coin dealers. He has been investing in physical gold and silver for over 15 years. His prior experience includes being an Analyst for a variety of Banks and Hedge Funds.

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