Gold Pumps After Monster Rate Cut – And So Will Inflation

In the wake of the Fed’s juicy 50 bps interest rate cut, the dollar responded immediately by dropping against gold. With more rate cuts on the way, Israel’s war expanding rapidly, and inflation ready to rip higher, new record prices are on the way for the yellow metal.

As predicted, the Fed was forced to cut hard to prevent a “hard landing” that would have threatened the entire system. Such a large cut signals that Jerome Powell and his colleagues know how troubled the economy is, and it’s highly debatable even with a half-point rate cut if the Fed can still avoid a recession. And with post-COVID inflation far from under control, more rate cuts—and even a possible round of QE—will make inflation rip.

Besides, if they’re “successful,” the Fed will only have kicked the recession can down the road, and guaranteed an even worse downturn when the cycle shifts from boom to bust. As for stocks, they’ve been bumped up by the rate cut as well – but only because of a weaker dollar. If you look at the increase in the gold price versus the stock market, stocks are actually down when you price them in gold instead of USD. As Peter Schiff said about the stock market on his podcast last Friday:

“It has been strong if you measure it in dollars…so the Dow was up 2.1%…gold was up 3.2%…so that means in terms of gold, the price of gold, the Dow was down. Even the S&P, which rose 3.1% on the week, in gold terms, it was actually lower…the Dow is getting crushed this year priced in gold.”

Meanwhile, cutting so hard while federal budget deficits remain monstrous and consumer prices are still out of control means that inflation is about to rip higher, tearing down struggling Americans who already can’t afford home repairs, food, healthcare, or car insurance. That could mean high inflation and a recession at the same time, with low growth, high unemployment, and tanking purchasing power for the dollar even as consumption slows. As the dollar declines, gold will continue to rip, reaching new all-time highs before the end of 2024. 

The rate cut is just what Democrats wanted, hoping it artificially pumps the economy enough for people to give them credit when they head to the voting booths in November. The main question is whether inflationary pressures will give way before or after. For consumers, a lower cost of borrowing doesn’t matter much if they have to pay 25% more dollars for the same groceries, rent, and gas. However, the lag between a change in monetary policy and its effects on the ground means that it will likely be longer before consumers really feel the results.

Unfortunately, those results will be a crushing blow to the dollar. And as the yellow metal rises from the dollar’s ashes, all-new highs for gold.