Interest rates, inflation, and where that leaves Gold and the markets. via /r/wallstreetbets #stocks #wallstreetbets #investing

Interest rates, inflation, and where that leaves Gold and the markets.

If you are skimming, read the bold.

With interest rates finally being raised on Wednesday, there’s a lot to look forward to in 2022 as well as the following decade. The FED has announced a 0.25% rate hike with what sounds like a target of 7 this year, leaving the target range somewhere between 1.75%-2.00%. What does this mean? It means money is becoming more expensive to borrow. This results in a tightening of the money supply in both the market and the economy. Borrowed money is permanently returned and removed from the system. To put it simply, imagine your credit card interest rate rising from 10% to 20%: you are not only less inclined to spend, but also pressured to pay off any outstanding debt ASAP. Hence the fear of money(outstanding debt) flowing out of markets and back to the lenders.

Exactly how much is 1.75%, and is it going to be enough to bring down inflation? Well, the inflation rate came in at a reported 7.9% last month. Most of us already know this number is detached from reality, the inflation calculation has been altered over the years to favor government irresponsibility. Using inflation calculations from 1980, the inflation rate would be at 16%. This sounds more reasonable and in line with the price increases we all have experienced.


Below is a chart of interest rates (orange) vs inflation (blue). Every time inflation gets out of control, rates are hiked in order to tame it. Back in the 1970’s, with inflation at around 12%, we needed hikes of 13% to bring it under control. Using the FEDs silly terms, that is 1300 BPS. Again in the 1970’s we saw near 15% inflation and 19% rates (1900 BPS) needed to bring it down. Nearly every year that inflation skyrockets, interest rates need to match or exceed in order to bring it under control. However, there is one difference between now and pre 2008, quantitative easing (aka uncontrolled money printing). When so much of our economy is reliant on printed money (debt), reeling the line back in is an impossible feat without a total collapse.

One look at 2018 and you begin to see the problem with rising interest rates in a debt dependent economy. Back in 2015, the FED decided to start raising interest rates to maintain a 2% inflation target for the coming years. This caused a massive strain on markets, resulting in both the NASDAQ and S&P500 dropping ~18% in 2018. After seeing this, the FED promptly reversed the decision.

The stock market and most assets are completely built upon and reliant on debt. Quantitative easing has turned our economy into a ponzi scheme with ever ballooning prices. Cutting access to that debt through interest rate hikes begins a cascading effect of “margin calls”. As one person goes to settle their debt, the outflow of money puts pressure on everyone else to repay their outstanding debt. One of the largest contributing factors to the 1929 market crash was Margin debt. Margin isn’t the problem, uncontrolled debt is.

This is why your schizophrenic, QAnon supporting uncle has been screaming that the global economy is about to crash every year for the past decade. This is at the core of gay bear ideaology. So why hasn’t it happened? And will it happen?

The entire goal of the FED is self preservation, they will do whatever they need to do to keep the economy from exploding. In what scenario will a bank or the FED EVER tell you they don’t have something under control? Doing so would cause panic, bank runs, and your uncle’s wet dream coming true. The FED will find any reason to keep printing. If 2018 is any indicator, a reversal on rate hikes is inevitable.

Now moving on to how the recent interest hikes affect gold. If you don’t know by now, gold is an unproductive asset. It doesn’t produce anything, it doesn’t grow, and it certainly doesn’t offer dividends. Opportunity cost is the price you pay for holding a stable asset while everything else around you is ballooning higher. Why hold gold, when you can gain 2% a year from bonds or 8% average from stocks? That premise is all based on the FED taming inflation, resulting in your 2% and 8% gains outpacing inflation.

As commodity & energy prices rise, so do the input costs of your favorite tech companies. Everything from running servers, to buying equipment, to maintenance all have energy or commodity costs associated with them.

Now combine this with consumer spending. When the average consumer’s bills go up, their consumer good spending plummets. Let’s take a look at what happens to Jane’s $2500 paycheck as rent, gas prices, and food soars. Jane used to pay $1000 for rent, $400 for food, and $200 in gas/utilities. This left her with about $900 to spend on consumer goods produced by your favorite companies in the stock market. Now that her rent is $1300, food $600, and $300 in utilities, her spending allowance is a third of what it was at $300. Even advertisement centered businesses like facebook/google see profit losses as less buying results in less marketing by companies. Nearly every company is dependent on the average consumer’s spending in one way or another.

Ok we get it there’s going to be lower profit margins for stocks, but where does this leave gold? Fundamentally, higher interest rates should mean that it’s more beneficial to secure your money in bonds; but what happens when the real rates (meaning the interest rates adjusted for inflation) are negative? If inflation is rising faster than interest rates, bond buyers are bleeding money.

As many of us know, the market looks ahead 6 months+ attempting to price in any future events. It’s why the stock market was falling before rates were actually hiked, and why so many people complain about the stock market soaring on expected bad news (it was priced in). Anticipation of bad news suppresses prices. That pressure is lifted when the expected news actually occurs. This is only true for expected events as unexpected events cannot be priced in.

Gold prices are no different. Back between 2011 and 2015, gold prices drilled to local lows in anticipation of interest rate hikes. No one wanted to hold gold knowing that in a few years the FED would raise interest rates, their money would be better off in bonds or elsewhere if that happened. This was the market pricing in rate hikes in the price of gold. The exact month that the FED hiked rates marked the bottom in gold. The following 4 years saw one of the largest bull runs in gold even with interest rates rising. The price was so suppressed in anticipation of FED responsibility that it ballooned higher when rates slowly increased. Once the FED reversed, and COVID forced interest rates to 0, gold went parabolic all the way to $2000/oz in August 2020.

So here we are again with an 18 month consolidation in gold prices as the market waited in anticipation of rate hikes and FED responsibility. During some of the highest inflation we have seen in our lives, gold went from over $2000 in summer of 2020, to reaching $1700 lows near the end of 2021.

How is this supposed inflation hedge losing money in the 18 months after COVID. Even after massive money printing, record inflation, wars, and every other event that should be sending gold higher?

It all comes down to the market pricing in interest rates and responsibility from the FED, which effectively suppresses the price. The market expected FED “responsibility”, but it’s time to face the music and Powell ain’t dancing. Now that rate hikes are actually happening, the pressure on gold prices is being lifted. There is a decade-long bull run in commodities coming and gold is not going to be the only player. Uranium, silver, and gold will be the trade of the decade.

TLDR: Input costs for stocks rising, consumer spending cut due to inflation bills. Anticipation of rate hikes has suppressed gold prices, actual rate hike always mark the bottom in gold prices historically speaking (buy the rumor, sell the news). Debt dependent economy cannot sustain rate hikes, the fed reversed in rate hikes 2018 after stocks crashed and will do it again.

Please at least read the bold in the post.


50% of my account is in $AG first majestic shares (a junior miner with one of, if not the highest leverage to gold & silver)

My other account positions are in silver miners as well as uranium miners like CCJ. These are mostly hedges against a black swan event in First Majestic. I picked mostly silver miners because I believe it is a higher leverage play on gold prices. If you don’t want to pick specific miners then I suggest $SILJ (junior silver miners) and GDX/GDXJ (gold miners)

Submitted March 21, 2022 at 01:29AM by Mufflestv
via reddit