Gold cheers when the Fed tries to fight the inevitable

Yesterday the Fed released the minutes from the FOMC’s July meeting. There were few surprises, but two things really stood out; members are anxious about inflation and they’re anxious about a recession.

Yesterday the Fed released the minutes from the FOMC’s July meeting. There were few surprises, but two things really stood out; members are anxious about inflation and they’re anxious about a recession.

As you will read below, this is good news for the gold price and anyone who has already decided to invest in gold.

This might sound odd as generally an increase in interest rates is believed to be bad news for those who own gold bars or coins, but actually, history shows that when central bankers and governments get nervous about the economy then we are set to see a positive environment for gold and silver prices.

The economic cycle never stands still. In fact, the global economy is such a tricky thing to comprehend we almost pity the central bankers who believe any effective control over the economy is possible! Needless to say, they are once again wrong.

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Central banks have been lifting interest rates to combat inflation. But those same interest rates have caused a recession. Or may it be fairer to say that recession had already begun before interest rates rose, but the bankers could not see the recession starting?

Either way the world is rolling over now from rising inflation fears into recession fears. Signs of recession setting in are popping in many data sources.

When will this recession end?


The U.S. is most likely in recession, which is two consecutive quarters of negative GDP growth. 2022’s first-quarter U.S. GDP growth came in at -1.6% and the Atlanta Fed’s GDPNow model currently estimates that second-quarter growth will be a negative 2.1%.

And since one definition of a recession is 6 months of negative growth…we are already in one and it began back in January – surprise!

The next big question is – when will this recession end? Followed by asking how deep will it get? Further questions will be about when central bankers decide to reverse course and lower the interest rates they just rose.

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Remember the central bank playbook is quite a short document. They raise rates to fight inflation and lower rates to fight the recession. They continually ‘provide liquidity’ when not playing with interest rates.

Source: Atlanta Federal Reserve

It’s not just the U.S. feeling the squeeze. Bloomberg reports that U.K. real household income is forecast to decline a record 2% this year.

UK Households Face Record Income Squeeze chart
UK Households Face Record Income Squeeze chart

And growth is expected to decline for 2022 in Japan as real household disposable income declines and the misery index climbs.

The misery index is measured by the sum of the unemployment rate with the annual change in consumer price inflation.

Japan Misery Index, Real Household Disposable Income Chart
Japan Misery Index, Real Household Disposable Income Chart

The equity markets, with steep declines this year to date are reflecting that recession has already begun.

And bond yields are also signaling recession with 2024 interest rates lower than today’s rates. And even oil has declined to under US$100 this week because markets expect that consumers will fly less and drive less.

What does gold do during a recession?

Recessions are not generally good for gold. But recession fighting by governments and central bankers is very positive for gold! Politicians always print money as a response to the recession and this time will be no different.

The continual growth of government printed money has accumulated for decades. This accumulation is why gold prices move ever higher over time.

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Gold Price Chart
Gold Price Chart

And even though gold and silver generally decline at the beginning of a recession a study put out by Bloomberg shows that since 1971, when then President Nixon ended the gold standard, that gold outperformed the S&P 500 for the two-year period surrounding recessions by 50% on average.

That two-year period is measured one year before the recession and one year after the recession.

The largest relative gain was the 1973-75 recession where gold outperformed the S&P 500 by almost 190%.

The relative gain during the 1980 recession was the second largest at almost 115%.  The 1981-82 recession period and the 1990 recession period where the only two out of seven recessions that S&P 500 outperformed gold.

Looking at 2022’s current experience year-to-date gold; has held its value – while the S&P 500 has declined more than 20%.

Gold and S&P 500 performance year-to-date chart
Gold and S&P 500 performance year-to-date chart

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