US President Donald Trump renewed his criticism of the Federal Reserve’s rate hikes on Wednesday, prompting speculation he may try and fire its Chairman Jerome Powell. Mid-term election polls, meanwhile, suggest Republicans could lose control of Congress. Either happening could be a bigger boon for gold bugs than any geopolitical event or trade war this year, analysts say.
In an interview with The Wall Street Journal on Wednesday, Trump retrained his guns on Powell, saying the Fed's head seemed to enjoy raising interest rates and causing disruption to the “great” things his administration was doing.
Though acknowledging the independence the Fed had in setting economic policy, the President made clear that he wanted lower rates, the Journal said. Powell's four-year tenure at the helm of the US central bank began in February and has already been marked by three rate hikes.
In the Fed's defense, the Journal noted that solid economic growth, falling unemployment and inflation near the desired 2 percent target prompted the central bank to raise rates to guard against the risk of unsustainable growth that could show up in the form of higher inflation or financial bubbles. Prior to December 2015, the Fed held rates at near-zero levels for years—another point of contention for Trump, who claimed his predecessor Barack Obama got an unmatchable deal.
Trump-Fed Showdown Could Be Big For Gold
Clint Siegner, precious metals analyst and director at the Money Metals Exchange brokerage in Eagle, Idaho, said in a blog post this week that a Trump move to fire Powell could be big for gold.
How big exactly, Siegner did not say. But in his prescient post made just two days before the Journal interview, he remarked:
“Despite what officials at the central bank say, they are not independent. We wonder if they will respond to the president’s call to stop tightening, or if the cartel of private bankers which holds formal ownership of the Fed has something else in mind.”
Aside from accusing the Fed of slowing economic growth, Trump also blamed the central bank for the plunge in Wall Street shares from record highs, Siegner noted. Should the president and his Republican colleagues concede control of Congress to the Democrats in November 6 mid-term elections, as various polling sites predict, the rout in stocks could worsen, pushing him to the brink in his fight with the Fed.
Siegner wrote:
“A further sell-off, perhaps sparked by a Republican defeat at the polls, could push Trump to replace Jerome Powell with someone more amenable—particularly if the (Fed) stays the course and delivers another hike in December and beyond.”
“Metals markets would likely rally following a policy reversal at the Fed.”
Gold prices hit a 2018 high of $1,365.40 per ounce in April. From there it fell to a 21-month low of $1,205 in September, hurt partly by the Fed’s three rate hikes through the month, which benefited the dollar at the expense of the yellow metal. Record highs in Wall Street shares also enticed fund managers to park money in equities, compared with safe haven assets such as gold that counted on geopolitical and financial troubles to prosper.
All that changed since the start of October as Treasury yields shot up too after bond holders sought higher compensation from the robust economy for the debt they held. Stocks tanked and gold hit 3-month highs, setting the yellow metal up for a 4 percent monthly gain—its biggest climb since January 2017. In Thursday’s pre-open trade, US gold futures for December were up $9.10, or 0.7%, at $1,240.20, heading for gold bulls’ next target of $1,250.
Democrats Win In November May Be Another Boon For Gold, Trouble For Stocks
Walter Pehowich is another analyst who thinks gold’s best shot for new highs in the fourth quarter would come from a change in control at the Congress, as that would place major blockades in Trump’s path, creating the risk-off environment in which the yellow metal typically thrives.
The executive vice-president at Dillon Gage Metals in Addison, Texas, said in a note on Wednesday:
“In my opinion the ‘only’ thing right now that can give the price of gold a significant boost is a Democratic victory in the midterm elections. This I expect will cause a significant correction in the equity markets and a rush of investors moving to safe havens in the gold and bond market investments.”
But even without an outright Democratic win in November, the stock market may not return to its previous position of strength in the face of rising interest rates, Siegner said.
That could only be good for gold, he said, adding:
“If (Fed) officials stay the course and hike again in December, the wheels could finally come off for equities.”
“The jig is about up, in our view. The bizarre combination of rising stocks, rising interest rates, near total complacency in the traditional asset markets, and the dollar getting stronger in foreign exchange markets can’t last forever.”