Interest Rate Hike in December?

After a year of anticipating a Federal Reserve interest rate hike, all eyes are on the Fed’s December meeting. There are two obvious outcomes: the Fed does raise interest rates or it does not. In his November Gold Videocast, Peter Schiff explains why both scenarios are bullish for gold. Peter points to the behavior of gold under both Alan Greenspan and Paul Volcker as proof that a rising interest rate environment isn’t automatically bearish for the yellow metal. On the other hand, if the Fed continues to delay raising interest rates, investors will begin to realize their expectations were ill-founded and reconsider their positions in gold and silver.

Either way, investors who have been waiting to buy should thank the Fed for extending the opportunity to buy gold for less than $1,100 an ounce.

Follow along with this full transcript:

Well, the price of gold has fallen back below $1,100. In fact, the price of gold has almost declined about $100 in the last month. We’re back down in the vicinities of the August lows. And I think this is an excellent opportunity for those of you who may have thought that the rally was getting away from you back in October when the price of gold was almost back up at $1,200. We got up to about $1,190 the morning before the Federal Reserve decided not to raise interest rates in October.

Now that was something that I had been anticipating. But what caused gold to sell off was the fact that the Federal Reserve in not raising interest rates in October, failed to remove a December rate hike as a possibility. And that got the gold traders selling. Then what really cemented the idea that the Fed was going to raise interest rates in December was the better than expected non-farm payroll report for the month of October that was released the first week of November.

Now I already did a podcast on why the jobs number was not nearly as strong as everybody is portraying it to be. I don’t want to recover that ground here, but I would encourage anybody listening to this gold video blog to go and read and watch my last video blog either at SchiffRadio or on my YouTube channel, The Schiff Report, to get my take on the over hyped October non-farm payroll number.

But what does it mean for gold traders? Well there’s two possibilities, right? One is that the Fed does in fact raise interest rates in December, and the other is that they don’t. And in my opinion, either scenario is actually bullish for gold. I think there’s $100 selloff from just below $1,200 to now back below at $1,100 is a great opportunity for people to either position themselves for the first time in gold, or increase the position they already have. And of course whatever I’m saying about gold also goes for silver.

But let’s take the first scenario, which I still believe to be the less likely of the two. That is, the Fed raises interest rates. What everybody thinks is that, well, this is negative for gold. Higher interest rates are going to hurt the price of gold. Everybody is selling gold because they know that Fed is going to raise rates, and they know that higher interest rates are negative for gold. So they want to get out in front of that reality.

Well, gold is already fallen substantially based on the fact that the Fed is going to be raising interest rates. So I think most of the downside, in fact, probably almost all of the downside in my opinion, is already here. The gold market is already discounted the rate hikes. In fact, I believe they discounted a lot more than a quarter point. I think the gold market already has baked in its cake several hundred basis points of tightening that are not going to develop, because I think even if the Fed does raise interest rates slightly by one quarter of 1%, barely above zero, that may be the last rate hike of the cycle. It might be the only rate hike of the cycle.

In fact, I think the Fed will go out of its way to take the sting out of the rate hike by reassuring the markets that they are going to be very slow in their assessment of the reaction of the economy. They are going to watch the economy. They are going to monitor the economy, and they’re going to be very careful before they follow up that rate hike with another rate hike. So I think that it’s going to be a buy the rumor, sell the fact. If they’ve been selling gold for years anticipating this rate hike. If the Fed does hike rates in December, it will likely be the most highly anticipated event ever when it comes to interest rates.

So since so many people have been anticipating it for so long, so many people have already sold gold based on this. So what is left for them to do? If they’re short, buy it back. If they got rid of their long positions, well, now it’s time to reestablish, because the event that they had been anticipating finally happened.

And of course markets are forward-looking. The market has been looking forward to the Fed’s first rate hike for years, but once the Fed begins to raise interest rates, then the markets could start anticipating the next easing cycle. They will start connecting the dots, “Oh, now the Fed is raising rates. That’s going to slow the economy. That’s going to hurt the stock market. That’s going to hurt the real estate market. That’s going to accelerate the time where the next recession starts.”

We’re already six years into this economic expansion. It’s one of the longest expansions ever. It’s certainly the weakest ever, but I don’t know how much more time is left in it. In fact, I do believe it will end sometime in 2016. And if the Fed does raise interest rates before the end of 2015, I think that will just accelerate the onset of that recession, and so the markets looking forward will begin to anticipate the next rate cut, the next easing cycle, QE4. So I think if we get the highly anticipated rate hike, that could actually end up being a bullish catalyst for gold, not a bearish catalyst, because all the damage they’ve already been done over the years, as people have been factoring this in to the price of gold.

And why do people think that higher interest rates are going to be so negative for gold? It’s because they think higher interest rates are going to be bullish for the dollar. But the dollar has already rallied for the same reason gold has declined based on the anticipation of rising interest rates. I think by the time the Fed actually gets started, it’s too little too late and the dollar is going to selloff. That is what happened the last time the Fed raised rates.

The Fed hasn’t raised rates in about 10 years. But when they started that last cycle back I think in maybe 2004, they raised interest rates very slowly. Remember Alan Greenspan, it was a measured pace. Every time they met, they hike by a quarter point. Gold rallied the entire time. The dollars sold off the entire time. Those rate hikes were not negative for gold or positive for the dollar. It actually was the reverse. So it’s a myth that higher interest rates would automatically be bearish for gold.

Now I would say an unexpected spike in real interest rates might be bearish for gold, but that’s all we have. This is not unexpected. Everybody expects this. And again, the type of interest rate environment that would be negative for gold would be high real interest rates. Think Paul Volcker. That is not going to happen.

Even if the Fed slightly increases interest rates, the real rate’s still going to be negative. The actual rate of inflation is going to be higher than the interest rate and that is always to be the case. So all that the Fed may succeed in doing is making rates slightly less negative than they already are. But the entire environment is extremely bullish for gold, and I wouldn’t wait for that rate hike to buy. I would want to buy now in case that the gold immediately sells off when the Fed hikes rates.

Now it’s possible, there could be a head fake short-lived rally if the Fed hikes rates, and that would be an even better buying opportunity in gold, but there’s no guarantee that it’s going to happen. The Fed might raise rates and gold could immediately take off based on so many people trying to sell the fact that after having bought the rumor or looking at it from the opposite perspective having sold the rumor and now they buy the fact.

But of course the other possibility is that the Fed doesn’t raise the interest rates, and there is no fact. It’s all rumor. If it turns out that the rumors of a rate hike were in fact false; that the Fed doesn’t get around the hiking interest rates. And I think if the Fed doesn’t raise interest rates in December, then gold prices are really going to take off, because then what’s going to happen is the people who’ve been selling gold are going to begin to question whether or not the Fed is ever going to raise rates. There’re going to be question whether they actually seriously were considering it, or in fact if they were doing what I’ve been alleging – bluffing the entire time talking about raising rates only because they know they can’t do it, but also because they know they can’t admit they can’t do it, because to do that would be to admit failure and invite a run on the dollar and a takeoff in the price of gold.

So I think either way, whether they do surprise me with a rate hike, a modest rate hike, a “one and done” type rate hike or they don’t raise rates at all, and try to continue pretending that they might, either way, I think buying gold now below $1,100 is a great buying opportunity. And one to be honest, I don’t even know if we’re going to get based on the way gold was taking off in October. Had the Fed not left a December rate hike on the table even though they may have no intention of actually hiking rates, the mere possibility that they would is what created this second selloff in the price of gold.

But it may, in fact, be an excellent double bottom, and I sure think it makes a lot more sense to buy now when gold is below $1,100 than waiting for it to be back above $1,200. And in fact, if we get above $1,200, it might be way above $1200 by the time a lot of people figure out that they need to buy it. So buying it now before the herd is a much smarter investment decision to make.

Reprinted from SchiffGold.com.

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