(Kitco News) - May 19 – Markets don't go in a straight line up or down. There are squiggles, pauses, rips and dips in trends.
Gold bulls got slapped back this week as traders pulled back on some short-term long positions as the spotlight shone brightly on the June Federal Reserve meeting. The release of the latest meeting minutes triggered speculation the June confab is now a "live meeting" for a potential interest rate hike.
Can't See the Forest For The Trees
Time for some perspective folks.
Perspective #1: The federal funds rate remains at historically low levels.
The current 0.25%-0.50% range is well below historical norms. Even one, two or three rate hikes (the latter being very doubtful) this year would still pull the funds rate to a still well below 'normal' rate level. No matter how you slice it and dice it, U.S. monetary policy remains extremely accommodative and even at a 1.00-1.25% level (supposing three rate hikes this year) would be at the lower reaches of where the Fed pulled rates during recessions.
Fact: Prior to the current easing cycle, The last time the federal funds rate stood as low as 1.00% was June 2003 –and that was the "bottom" of the easing cycle.
Perspective #2: This business cycle is getting old. According to the National Bureau of Economic Research (they are the folks that get to make the call on when U.S. recessions start and end), the current economic expansion cycle began in June 2009. (The recession that ended in June 2009 lasted 18 months, or the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months, the NBER says.)
What matters now: The average US business cycle expansion since WWII is 56 months or 4.5 years. The current cycle is set to hit its seventh birthday in June.
The latest GDP figures were gloomy. First quarter U.S. GDP slid to a 0.5% increase from the fourth quarter's still-paltry 1.5% rise. The so-called "trend growth" of the pre-global financial years of 3.5% or more appear to be history.
The odds are: that the next recession will hit in the U.S. before the Federal Reserve has the chance to hike interest rates back to a more historically "normal" level –say in the range of 4.00%. In the last interest rate hike cycle, rates peaked out at 5.25% in June 2006.
Why this matters to gold now: In all likelihood, even if the Federal Reserve manages to pull the trigger on one or two interest rate hikes this year (don't forget we've got a presidential election here in the U.S., which can throw another monkey wrench into rate hiking plans), rates are still well below average historical norms. Translation: even .50 basis points of rate hikes don't mean much.
Key point: When the next recession hits, the Federal Reserve may be forced to join its counterparts: the ECB and the BOJ with a move toward negative interest rates, and that is bullish for gold.