Investors Continue Misguided Selloff of Gold Despite Coming Inflation
Monday saw a drop in gold prices as investors look to the Federal Reserve to raise interest rates next week. The misguided selloff comes despite almost certain future inflation levels, and many traders are likely to backtrack their bets in the coming months.
Higher interest rates will add to inflationary pressures. Leveraged businesses will find servicing their existing debt more expensive and will inevitably pass the cost on to consumers in the form of higher prices. Consumer price increases are detrimental to economic growth and job creation, which will put pressure on the Fed to keep rates low.
Optimism about increased consumer spending also seems to ignore the recent OPEC agreement to cut production. Less oil supply will drive up the price of almost every consumer good, given that it’s used to make everything from plastic goods to the fuel for vehicles driving to the store to purchase products. Even with record online sells, higher fuel and manufacturing costs will be passed to consumers via delivery services like FedEx.
Some investors are looking to a Trump-induced stimulus via tax cuts to stimulate consumer spending, but those are still hypothetical. Even if the tax cuts happen, we’re likely to see little increase in consumer spending due to higher prices. There won’t be enough spending to offset the loss of government revenue resulting from a tax cut. Less government revenue will widen the spending deficit and increase the national debt while higher interest rates will make servicing that debt impossible.
Even when the Fed hikes rates this month, it will likely be a quarter point, which won’t help stamp down inflation. More likely, the Fed is already behind the curve and will need to catch up with a meaningful rate hike that will be impossible without imploding the markets. Inflation will continue to devalue the dollar and those buying gold and silver to protect their wealth will be ahead of the game.
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