The year 2022 is going to be described best by one word: volatility.
It has already been a heck of a run with the stock market tanking, wiping out much of 2021’s gains, and it’s not even February. The Goldilocks investing phase has ended, welcome to chaos.
Does this mean that all asset classes will crash? No. This doesn’t even mean that the stock market will stay down. It means that prices will be all over the place with highs, and lows, and everything in between.
So, what does this mean for gold? That is a great question.
The big thing that has shocked the stock market, and caused some of the biggest tech names (the FAANG’s) to lose trillions of market cap, (Netflix dropped 25% in one day) is the Fed’s tightening or raising of interest rates. Now, this requires a bit more digging. If you study the Fed you will begin to understand how they use “credible threats”.
— Federal Reserve (@federalreserve) January 14, 2022
The Federal Reserve now views the rampant inflation as a credible threat and they have to do something about it. But the Fed often threatens the market to project what it wants the market to do, without actually doing the thing they threaten.
This means the Fed is threatening to raise interest rates, but they haven’t raised the rates hardly at all. Yet. Markets have tanked in anticipation of the Fed’s actions. Remember, the market is a forward-looking mechanism, so you want to buy the rumor and sell the news. The market action so far has been the selling of the news.
Now that we discussed Fed tightening, what else can move the gold price? That leaves two major influences left, inflation, and the supposed economic recovery from the worldwide flu.
The inflation problem is difficult. There are two causes of the inflation, the money printer go brrrr and also the supply crunch. We’d like to think that the supply side of the equation is slowly working itself out, and when supply opens back up prices on durable goods like lumber and automobiles will decline.
Most of the supply problems are caused by government restrictions around the world. And governments love all these restrictions because it gives them vastly more power than if they were not imposing tyranny. That leads us to believe that the supply side will not be fixed anytime soon, so that will contribute to an increase in inflation.
And Fed’s tightening at the very most would be a 1% rise in interest rates, which would definitely cause a shock to the markets because they are so used to easy monetary policies, but even a 1% rise is still very low and unsustainable rates from a historic perspective.
And the government is still going to be spending and printing money with reckless abandon, this will never change.
So, the short of it is, the most likely scenario is that inflation will not go down, but the rate of increase of inflation may go down slightly.
All this talk of Fed tightening (OMG, they’re gonna raise rates a tini-tiny bit) initially put downward pressure on the spot price of gold. But as the days unfolded the gold price has been able to absorb this negative news and is starting to rise.
Because nothing has changed from the macro picture. Yes, there have been some recent noise to rattle the markets and investors, but all the catalysts are in place to push gold prices hirer. When you zoom out, nothing has changed and all the energy is supporting the gold price.
You might be wondering; “What is the best way for an individual investor to get exposure to gold and precious metals?” The best way for most people to own gold is in a tax-protected account called an IRA. Now, it is complicated to have gold in your IRA so it is best to work with a company that can walk you through the process. If you’d like to learn more about this then you should read this Noble Gold review.
With markets doing their best to recover from the shutdowns and get supply lines back up and running, and the Fed entering a hawkish phase and tightening or even raising rates, you may think that gold’s best days are behind it. That is not what I’m betting on.
You see, things are only getting crazier. One of the big misconceptions about gold is that it rises in the face of inflation, well, we hate to break it to you but if you look at the data from the last 100 years of inflation versus the price of gold, you will see that correlation is weak to nonexistent.
This is where most investors get it wrong. Gold is not all that good at being an inflation hedge, what gold is good at is being a chaos hedge. When populations of people do not trust the actions of their government, they buy, store, and hoard gold. And governments around the world are displaying the most wild, erratic, and aggressive behavior we have seen in decades.
This is great for pushing the price of gold upward.
Now, it’s time to consider what no one is talking about. What if we have gotten as good as the economy is going to get? What if we are at full employment, and the economy takes a nosedive. What do you think will happen then? The governments around the world will do what they always do, they will print money endlessly.
No, unlike the economy, gold has entered a Goldilocks phase. Gold wins almost no matter what. If the economy gets a little better, gold is likely to go up. If the economy tanks, the government will binge on money printing like never before, and gold will go up.
If you are a buy and hold investor, and hopefully you are because most traders are short-term traders. After all, they quickly go broke trading, then the next 3-5 years should treat you very well. If you just sit back and hold, and do nothing you can ride through this storm comfortably. If you do this while holding in a tax-advantaged IRA, you’ll do even better.
The future is bright for the prudent investor.