Gold Isn’t Following the Fed’s Script and a New Uptrend Looms

Well, so much for the idea that higher interest rates automatically mean lower gold and silver prices.

The Federal Reserve raised rates this week for the first time in three years. And if you listened to the conventional Wall Street wisdom, you might have expected precious metals to get clobbered. They did take an initial hit. But then something interesting happened. They turned around.

As we record this Friday morning, gold has pushed back toward $4,400 an ounce, while silver has climbed back to over $67. So, gold has bounced back the last couple of days since the Wednesday Fed announcement, while silver’s comeback is especially noteworthy.

Remember, silver got absolutely hammered during the correction earlier this month. It fell from above $70 an ounce all the way down into the low $60s. But silver has now bounced several dollars off those lows. More importantly, it is beginning to show some technical signs that the correction may have run its course.

Analyst Clive Maund recently took a close look at the silver charts, and he sees several encouraging developments. On the longer-term chart, the recent selloff still looks like a correction within the much larger advance that came before it. Selling pressure also appears to be easing. And on the shorter-term chart, silver appears to be forming what technicians call a “cup-and-handle” pattern.

I’m not going to turn this into a technical-analysis seminar. The basic idea is pretty simple. Silver sold off hard. It found buyers. It rebounded. And now it appears to be building a base from which it could potentially launch another move higher.

If silver can break convincingly above nearby resistance, Maund thinks that would provide additional evidence that a new uptrend is underway. Of course, there are no guarantees when it comes to charts. And if silver has taught us anything this year, it’s that the white metal can make some violent moves in both directions.

But the fact that silver is showing technical strength immediately after the Federal Reserve raised rates is particularly interesting. It flies in the face of one of the most persistent bits of conventional wisdom about precious metals.

You’ve probably heard it a thousand times. Gold doesn’t pay interest. Silver doesn’t pay interest. Therefore, when interest rates rise, investors should dump precious metals and move their money into interest-paying assets.

There is some logic to this. But there’s also a pretty big hole in the argument. It ignores inflation. What ultimately matters isn’t simply how much interest you’re earning. It’s how much purchasing power you’re gaining — or losing — after inflation.

Consider the 1970s. Interest rates rose dramatically during that decade. If higher interest rates were automatically poison for precious metals, gold should have been dead in the water. Instead, gold went on one of the greatest bull runs in its history because inflation was also running rampant.

In 1974, for instance, a 3-month Treasury bill yielded around 7.4 percent. That sounds pretty good — until you realize consumer price inflation peaked around 12 percent that year. That supposedly “high-yielding” Treasury was still losing purchasing power.

And there’s another problem with the higher-rates-equal-lower-gold narrative. Why is the Fed raising rates in the first place? Well, because inflation is becoming a big problem. And why do people buy gold? Well, one of the big reasons is because inflation is a problem.

So, the very conditions forcing the Fed to raise rates can also strengthen the case for owning precious metals.

And then we have the elephant sitting in the room. Debt.

The federal government is carrying roughly $40 trillion of debt. Higher interest rates make financing that enormous debt load more expensive. That means bigger interest payments. Bigger deficits. More borrowing. And eventually, even more pressure on the Federal Reserve and the monetary system.

This is why we’re skeptical when people confidently tell us the Fed is simply going to crank interest rates higher and leave them there until inflation disappears. There is a price to pay for doing that. And with this much debt sloshing around the system, that price gets very expensive very quickly.

So, while everybody obsesses over whether the Fed hikes another quarter-point at its next meeting, something much bigger is happening underneath the surface. Governments, central banks, institutions, and wealthy investors around the world continue positioning themselves for a monetary system in which gold plays an increasingly important role.

And one of the clearest signs is what’s happening in Asia.

Singapore is rapidly building itself into a major gold trading and storage hub. And apparently, they’re running out of room.

DBS Group, Southeast Asia’s largest lender, is expanding its bullion storage capacity because of growing demand from private-wealth and institutional customers. OCBC Bank has also reportedly been talking with precious-metals storage providers about securing additional space. Deutsche Bank is considering similar moves.

And Le Freeport — the giant high-security facility sometimes called “Asia’s Fort Knox” — is reportedly running short of premium basement vaulting space.

Think about that for a second. While Western investors debate whether they should sell gold because the Fed moved interest rates by a quarter of a percentage point, institutions in Asia are scrambling to find places to put physical bullion.

Singapore already has at least 2,200 tonnes of privately operated gold-storage capacity. And the Monetary Authority of Singapore plans to make its own vaulting facilities available to sovereign entities and foreign central banks.

Singapore is also preparing to launch an over-the-counter gold clearing system through the Singapore Exchange, designed to handle both the 400-ounce bars common in Western markets and the 1-kilogram bars favored in Asia.

Hong Kong is making similar moves. It has revamped its gold futures market, launched a clearing and settlement system, and plans to expand vaulting capacity to 2,000 tonnes over the next three years.

This isn't happening by accident. For decades, London, New York, and Switzerland have dominated the global gold trade. But gold has increasingly been moving from West to East. And now the infrastructure is following the metal.

New vaults. New clearing systems. More physical settlement. More capacity for central banks and institutional investors.

That strikes us as a much more important long-term story than whether the Fed funds rate goes up another quarter-point. And it also helps explain why gold has been so resilient.

The old playbook says higher interest rates should crush gold. But gold isn't trading solely on what the Federal Reserve does anymore. Central banks are buying. Asian demand remains strong. New physical gold infrastructure is being built. And governments around the world continue piling up debt and debasing their currencies.

Let’s recap the market action here.

Gold, platinum and palladium are all seeing very small gains for the week. Gold is up about $30 or 0.7% to check in at $4,390 an ounce. Platinum is up less than 0.5% to come in at $1,818. And palladium is up 0.3% to trade at $1,330.

But silver, as we mentioned earlier, is outlier – having moved up more than $2 an ounce this week or 3.4% to come in at $67.37 an ounce as of this Friday late morning recording.

Next week will be telling for the white metal. Perhaps the rally will fizzle out after the big advances we’ve seen here each of the last couple of days of this week. Or maybe we will see some follow-through and another run at $70 and possibly beyond in the days ahead. Time will tell, so stay tuned.

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