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To Hike or Not to Hike

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That is the question. Oh sure, The Fed may attempt to hike the fed funds rate as soon as next month. They may even attempt another hike in April or May. But what happens after that? Answer that question and you'll find a timetable for gold prices in 2022.

As February begins, we can start to look forward to what the year may have in store for us. In our macrocast for 2022, we wrote about how it will be similar to 2010 and 2019. Both of those years began with the narrative of pending rate hikes and Fed balance sheet reduction, and both of those years ended with the complete opposite of rate cuts and additional QE.

And now here we are again in 2022. The "markets" and the eight-figure Wall Street sell side economists all believe that the Fed is about to embark upon an aggressive course of rate hikes. And we're not just talking about the one or two mentioned above. Instead, these brilliant theoreticians now forecast as many as SEVEN fed funds rate hikes this year. SEVEN!!

fed GDP chart

So, let's see. A total of seven rate hikes would place the fed funds (overnight) in a range of 1.75-2.00%. OK, fine, but what would this do to the rest of the yield curve? The yield on the 2-year note is already at 1.20%. If fed funds push toward 2%, could we expect the 2-year note yield to move to near 3%? Sure, why not? And if the 2-year note is at 3%, where might we find the yield on the 10-year note? Maybe 4%? Chew on the improbability of that for a moment.

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But then there's this. As we mentioned in our macrocast, what happened in late 2018, the last time fed funds reached 2% with the 2-year nearing 3% and the 10-year over 3%? Oh yeah...the stock market collapsed 20%.

chart

And now here we are in early 2022. The Fed has yet to raise the fed funds rate even once, but check the similarity of the current S&P chart to the one above:

chart

Now maybe you live in some sort of Fantasy Land where you actually believe that the Fed will allow a stock market crash in order to "deflate some bubbles". Not only is that foolishly naive to economic reality after thirteen years of QE and ZIRP, it also flies in the face of recent history. To wit:

  • As 2010 began, the Fed's sycophants in the media and on Wall Street promised that QE1 was a "one-off", never to be done again. Interest rates and the Fed's balance sheet will soon return to "normal", pre-Financial Crisis levels.
  • Reality? The Fed announced the $600B QE2 program in November of 2010.
  • As 2019 began, the Fed's sycophants in the media and on Wall Street promised that the Fed would continue hiking that year with the yield on the 10-year note exceeding 4.0%.
  • Reality? The December 2018 stock market crash led to the "Powell Pivot" and the Fed began cutting the fed funds rate in June of 2019. The yield on the 10-year note fell from 3.25% in November of 2018 to a low of 1.50% in September of 2019.

And how did dollar-priced gold perform during these periods?

  • 2010: +29.5%
  • 2011: +10.1%
  • 2019: +18.9%
  • 2020: +24.6%

OK, so now here we are again. The Fed is promising to start hiking the fed funds rate while simultaneously drawing down their balance sheet. Maybe this time will be different? Maybe this time their beloved stock market won't crash? Maybe the U.S. economy can withstand higher interest rates and all the associated economic impacts that follow? But have you seen the most recent Q1 GDP forecast from the Atlanta Fed? It certainly appears that the U.S. is already tipping over into a stagflationary recession, and into this we should expect seven rate hikes? OK, then.

chart

In closing, let's refer back one more time to our 2022 macrocast. In that post, we projected that 2022 might very well play out much as 2010 and 2019 did. Namely, some frustration in the first third of the year, some breakouts in the second third, and then some decent gains in the final third. Based upon what we've seen thus far in 2022, we appear to be on track.

chart

And why will 2022 play out this way? Because just as in 2010 and 2019, The Fed will once again be revealed as posing charlatans. The curtain will be pulled back, and all will be reminded again that the monetary masters are indeed trapped, for once you head down the road of QE and ZIRP, there's no going back.

Physical gold and silver have always been—and will continue to be—your protection against this madness. You should consider acquiring some before prices head higher again in the weeks to come.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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