The Gold Market: Performance and Defiance Amid Fed’s “Disinflation” Policies

Most people would laugh if they heard the Federal Reserve’s claims of the economy reaching the disinflation stage. Jerome Powell, the Fed’s chairman, recently declared victory over inflation. Mind you; this statement was no different than the similar claims in 2021 and 2022 that clearly turned out inaccurate.

“It is gratifying to see the disinflationary process now getting underway,” said Powell, while a carton of eggs more than doubled in price and the long-awaited drop in gas prices just soared again. His explanation included “slower growth, some softening in labor market conditions, and inflation moving down steadily, but not quickly.” 

The Federal Reserve’s answer to this never-ending battle against inflation now is to forget about inflation and focus on softening the economy. Yes, the plan is to create a soft economic landing, creating high expectations for central bankers to shift toward rate cuts and loosened campaigns in the near future. 

While the Dollar Index may show slight dips, reaching a nine-month low only a few days ago, these efforts aren’t affecting precious metals. Gold prices only continue rising. As the Dollar Index dropped, gold reached a nine-month high of $1,950 per ounce, displaying the exact opposite of disinflation.

Disinflation efforts open up the topic of deficit spending. Government deficit spending is often one of the primary new currency creation drivers, though the U.S. does have borrowing limitations. In just the last week, President Joe Biden and Kevin McCarthy, the House GOP leader, met to debate increasing the debt ceiling, though they’ve yet to land on a decision. 

While some believe these changes in borrowing policies could lead to catastrophe, the bond markets reflect 100% confidence in the government borrowing more currency and circulating it throughout the nation to pay off debts. If this rings true, disinflation will be a pipe dream. 

It’s only fair to note that the economy has softened in a few areas. In recent weeks and months, the auto and real estate industries have shown slight price decreases while the precious metals industry continues moving upward. While disinflation tactics may have caused lags in precious metal performance rates at the beginning of 2022, most do not predict that this will continue in the upcoming year. 

Analysts believe the gold market will outperform the Federal Reserve’s disinflation attempts without question. The London Bullion Market Association conducts a survey each year with renowned analysts to gather and compare price fluctuation predictions. 2023’s predictions show that gold may increase by 3.3% from the year prior, jumping from $1,800 per troy ounce to $1,859. 

What stands out the most from these predictions are the reasonings behind them. The analysts each provide an answer as to why these trends may occur. Nearly half of the analysts (43%) claimed that the Federal Reserve’s actions in this upcoming year would directly cause an increase in gold prices. 

According to this group of predictions, not only will gold defy the Fed’s actions, but the Federal Reserve will actually contribute to this increase. The other cited reasons include inflation and geopolitical factors, all tying into a similar root cause. 

So, if disinflation efforts aren’t working and rumors of a recession are entering the discussion, what does this mean for investors, and how does gold come into play? As everything becomes more expensive and the U.S. potentially borrows more cash, which only worsens the situation, investors need to rely on less volatile assets. Gold is the tried-and-trusted answer to inflation because it is one of few things that remains steady and even increases while all else fails. 

Precious metals offer a long-term solution to what are often short-term problems. Gold may not yield an instant answer to high prices and poor economical solutions, but it can protect the value of one’s savings from a volatile market. Data from the World Gold Council shows that the eight inflation periods between 1974 and 2008, where rates were over 8%, all showed an increase in gold prices by over 14.9%

Taking advantage of these increases often requires a minimum decade-long investment. Many investors prefer tax-advantaged options like gold IRAs that allow people to purchase gold and contribute funds to their preferred retirement account. Rather than covering delivery and storage requirements, gold IRAs offer ideal simplicity for investors using the long-haul strategy. 

Understanding how inflation and gold prices impact each person’s financial scenario isn’t easy. Before making any decisions, investors should meet with their financial advisor to discuss the best options considering this future positive outlook for the gold market.

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