Here we go again. The Federal Reserve is talking about interest rates, financial television is losing its collective mind, analysts are staring at charts like they’re trying to decipher the Dead Sea Scrolls, and inevitably somebody walks into the shop and asks, “So…what’s going to happen to gold?”
Great question. The answer? Who the hell knows.
Okay, that’s not entirely true. Nobody knows exactly what gold and silver are going to do, but we can make a pretty educated guess about how the metals market might react depending on what the Fed does. And there are really two sides to this thing: the Fed raises rates, or the Fed doesn’t.
Let’s start with a rate hike.
On paper, higher interest rates should be bad for precious metals. Gold doesn’t pay interest. Silver doesn’t pay interest. They just sit there being shiny and completely incapable of sending you a dividend check. Meanwhile, when interest rates rise, Treasury bills, CDs, money-market funds and other interest-bearing investments start looking more attractive.
So an investor might reasonably ask, “Why the hell would I own gold when I can sit in cash and actually get paid?”
That’s the basic argument against gold when rates rise. Higher rates can also strengthen the U.S. dollar, and because gold and silver are priced internationally in dollars, a stronger dollar can create additional pressure on metal prices. If the Fed unexpectedly raises rates, we could initially see Treasury yields move higher, the dollar strengthen and gold and silver sell off.
Silver, of course, could decide to fall twice as hard for absolutely no reason other than the fact that it’s silver and apparently enjoys causing emotional damage.
But here’s where it gets interesting.
If the Fed raises rates, you have to ask why they’re doing it. If the answer is that inflation is still a problem, then the Fed has essentially admitted that inflation isn’t as under control as everyone hoped. Suddenly the conversation changes from “the Fed raised rates” to “shit, how bad is inflation that they had to raise rates again?”
Then investors start wondering whether another hike is coming. Then another. Then they start wondering whether the Fed is behind the curve. Eventually somebody asks the really important question: How much economic damage is this going to cause?
Higher interest rates aren’t free. Mortgages become more expensive. Car loans become more expensive. Credit-card debt becomes more expensive. Businesses have a harder time borrowing money. Commercial real estate gets squeezed. And servicing our already enormous federal debt gets even more expensive.
At some point, higher rates can slow the economy enough that investors start worrying about recession, financial stress or something breaking somewhere in the system. And when people start getting nervous about the financial system, suddenly that boring chunk of metal that doesn’t pay interest starts looking pretty damn attractive again.
That’s why the old “interest rates up, gold down” rule isn’t nearly as reliable as people think. Gold could absolutely get smacked immediately after a surprise rate hike and then turn around weeks or months later as investors begin worrying about what those higher rates are actually doing to the economy.
Now let’s flip the whole thing around.
What happens if the Fed doesn’t raise rates?
If inflation is still hanging around and the Fed decides to leave rates alone, the market could interpret that as the Fed saying, “Yeah, inflation is still a little hot, but we’re willing to live with it.”
That could be very good for precious metals.
If inflation stays elevated while interest rates remain unchanged, the purchasing power of your dollars continues to erode. Your $100 bill still says $100 on it. It just buys less shit than it did before. And protecting purchasing power is one of the reasons people have owned gold for thousands of years.
A decision to hold rates could also put downward pressure on Treasury yields and potentially weaken the dollar. Both of those things would generally be supportive of gold. Silver could follow right along, particularly if investors also believe the economy will remain strong enough to support industrial demand.
But—and there’s always a damn “but” with financial markets—the Fed’s actual decision is only half of the equation.
The other half is what everybody expected them to do.
Markets don’t simply react to news. They react to surprises. If virtually everybody expects the Fed to leave rates unchanged and the Fed leaves rates unchanged, the market might shrug its shoulders. Gold could move a little, silver could bounce around and twenty minutes later everyone is back to arguing about something else.
But if everybody expects a rate hike and the Fed unexpectedly holds? Now we have something interesting. Treasury yields could fall, the dollar could weaken and precious metals could move sharply higher.
The opposite is also true. If everyone expects the Fed to hold rates and suddenly they announce a hike, gold and silver could get punched right in the face—at least initially.
That’s why asking, “What is the Fed going to do?” isn’t really enough. The better question is, “What does the market already THINK the Fed is going to do?” Because if everybody already expects something, a lot of that information is probably already reflected in the price.
Then there’s silver.
Silver is basically gold’s slightly unhinged little brother. Gold is primarily viewed as a monetary asset, store of value and safe haven. Silver plays some of those same roles, but it’s also an important industrial commodity. That means silver can get pulled in multiple directions at the same time.
If rates stay lower, economic growth remains decent and industrial demand stays strong, silver can benefit. If investors simultaneously start buying precious metals because they’re concerned about inflation or the dollar, silver gets another source of demand. When both forces line up, silver can move very quickly.
Unfortunately, that works both ways. When metals sell off, silver has an impressive ability to make you question every financial decision you’ve made since high school.
So does all of this mean you should buy gold before the Fed makes its decision?
Here comes everybody’s favorite answer: It depends.
I know. Terrible answer. But it’s the correct one.
If you’re buying gold because you think you can predict exactly what happens thirty seconds after a Federal Reserve announcement, congratulations—you’re not really investing anymore. You’re gambling.
If you’re buying precious metals because you want diversification, something outside the traditional financial system, protection against long-term currency debasement, or because you simply don’t have complete faith in politicians and central bankers managing trillions of dollars responsibly, that’s an entirely different conversation.
At the shop, we’re not sitting around trying to predict whether gold jumps $50 at 11:01, drops $80 at 11:17 and then finishes the day exactly where it started. We’re watching the bigger picture: inflation, real interest rates, Treasury yields, the dollar, government debt, central-bank gold purchases, economic growth and investor confidence.
Because gold doesn’t necessarily go higher simply because “things are bad.” Gold tends to become more attractive when investors become less confident in the alternatives. That’s an important distinction.
So if the Fed unexpectedly raises rates, precious metals could absolutely get hammered initially. If the Fed holds rates when everyone expects a hike, gold and silver could rip higher. But after that initial reaction, the market is going to start asking why the Fed made the decision it did.
And that’s where the real story begins.
A rate hike could eventually become bullish for gold if investors believe inflation is becoming entrenched or that the Fed is pushing the economy toward recession. Leaving rates unchanged could also be bullish if investors believe the Fed is allowing inflation to run and the dollar’s purchasing power to continue deteriorating.
Either way, one thing is almost guaranteed. About fifteen minutes after the announcement, there will be a whole bunch of experts on television explaining why whatever just happened was completely obvious.
Funny how nobody seems to write that article the day before.
We’ll be watching. We’ll be buying. We’ll be selling. And we’ll probably explain this exact same thing seventeen times at the counter.
Just another normal week in the precious-metals business.
Redmond Rare Coins & Precious Metals
Rare Coins • Gold • Silver • Precious Metals
None of this is financial advice. If you’re taking investment advice from a sarcastic coin dealer on the internet, that’s between you and your financial advisor.