Famed author believes the Fed could push the metal into a major rally
Gold’s price fluctuations have long been tied to the Federal Reserve’s actions – the perceived tone of Fed officials in public statements and meetings and expectations of rate hikes both tend to impact the price of gold, sometimes regardless of the Fed’s decision.
Expectations are high for a rate hike this month, and many even see a 100% chance of the Fed following through. Yet famed author and investor Jim Rickards is among those doubting the Fed’s ability to go through with the forecasted hike.
Talking to Kitco, Rickards pointed out the oft-overlooked factor of inflation goals. To Rickards, the Fed’s duty lies in job creation and price stability. With the former all but taken care of, the real issue becomes whether the central bank can meet its inflation targets year-on-year.
The article notes that, finding energy and food prices too volatile, the Fed tends to focus on Personal Consumption Expenditures, or PCE, in order to gauge whether inflation standards are being met. As Rickards points out, the PCE index continues to present a problem for the Fed due to its nine month-long decline, falling from 1.9% to 1.3% in that span.
Rickards says the threat of disinflation immobilizes the Federal Reserve and makes a December rate hike unlikely despite market expectations. Should the declining PCE stay at 1.3% or fall lower, there is no chance of a rate hike happening this month.
The article then recognizes Rickards’ opinion goes in line with the summary from the Fed’s latest policy meeting. In it, Fed officials noted that inflation might remain below the targeted 2% longer than expected, with some acknowledging that policy firming should be halted until inflation returns to the desired path. Some participants of the meeting also expressed concerns that following through with the planned rate hike before the end of the year could further subdue inflation expectations.
This discourse already helped gold come close to recapturing the $1,300 level, stopping just short at $1.295 an ounce. Rickards, however, believes that the motion around the $1,300 level is less important compared to what’s coming.
The author expects the Fed’s renegation of the December rate hike to have a massive impact on the markets, which will take a 180-degree turn. As a result, the dollar and bonds will fall while gold will rally further.
His long-term prediction is that gold will go as high as $10,000 an ounce.
While this level might sound exorbitant, Rickards stresses that the forecast is realistic as having such a price of gold is the only way to avoid deflation.