The Federal Open Market Committee has announced a doubling in the pace of asset tapering on Wednesday. The Dot Plots indicate that there will be an average of three rate hikes in 2022, three more in 2023, and two in 2024, all in increments of 25 basis points. Gary Wagner, editor of TheGoldForecast.com discusses with David Lin, anchor for Kitco News, the impact that monetary policy next year will have on financial markets.
We're continuing our outlook 2022 series with Gary Wegner editor of the gold forecast.com. And today we'll be talking about Gary's outlook for gold, silver, and fed monetary policy. Gary, welcome to the show. I'm very excited to have you as part of our series. Thank you so much for having me and an interesting day, uh, to do the show.
Interesting day to day fed day on Wednesday. I'm just going to read a statement where a quote from the statement from the FMC that came out earlier this afternoon, it says in light of inflation developments and the further improvement of the labor market, the committee decided to reduce the monthly pace of its net asset purchases by $20 billion for treasury securities and $10 billion for agency mortgage backs.
So they are quickening the pace of tapering. And on top of that, the dot plots, which also came out today, indicated potential rate hikes for the next couple of years, more specifically three projected rate hikes for 20 22, 3 more for 20, 23 and two more for 2024, all in 25 basis point increments. So it's pretty clear, Gary, the fed does want to raise interest rates down the line, or at least it's saying.
That it wants to raise interest rates, but why is it that we had rallies in both stocks and gold today on the news? Well, I think what we saw first of all, was the fact that they made the distinction between when they would begin lift off or the initiate, the initiation of interest rate normalization, uh, and make that still day-to-day dependent on maximum employment.
By compressing the timeline or accelerating the timeline for tapering, they will be done, uh, early next year, January or February. But chairman Powell said during the press conference that he doesn't expect the first interest rate hike to come until June of 2022. And so what that means is that they're still going to be basically a 0% interest rate fed funds.
For the rest of this year and the first half of the next year. And I think that in terms of, especially equities are forward thinking, but only about six months out in time. So they're looking at still having cheap money. And that's what I think we saw in other, another interesting note that he said was that he talked about accelerating tapering, but he didn't talk about reducing the huge asset balance sheet.
His only comment. Yeah, we'll have, we'll have such a large balance sheet that we'll be able to sport liquidity needed, uh, for the economy. And if I'm correct, I think that the asset sheet is well it's north of a trillion, I think about 8.6 trillion. He didn't talk about a reduction in that. So I found that also interesting.
Okay. Uh, well, why would they have to produce a balance sheet? I don't remember the last time the fed has actually reduced the balance sheet. If you look at. The F the feds assets or charter that, you know, it's been a steady, straight line upwards in the last 15, they did reduce it or attempted to, if you recall, in the 2008, nine recession, they took it up to $4.5 trillion.
They did operation twists. That was, I think QE three or QE four, but then they began to reduce it and they actually took it from 4.5 trillion to 3.8 trillion. And at that point they felt that any further reduction of the acid. I would take liquidity too much liquidity out of the market. So they have had one attempt at it, but they wanted to get it much lower and found they could not.
Yeah, you're right. I'm just looking at the, uh, the total assets here. I'll put up a Charlotte. Really, I don't know how successful they've been at it because according to this chart has been, you know, steady climbing. But anyway, your point, your point holds let's talk about a gold and silver. Well, before, before we do that, before we give your outlook on the metals, uh, do you agree with the dot plots first and foremost, three hikes next year?
Does that seem aggressive to you? I think that a, the fed got it. Uh, they underestimated the pace at which the inflationary pressures would grow and how persistent they would be. Now that they're acknowledging the fact that we have persistent inflation, um, and taking out the word transitory, they are in my mind, chasing inflation.
In other words, they're reacting to the inflationary level rather than being proactive about. And that to me is not what the federal reserve is supposed to do. They're supposed to anticipate, and then execute a plan, have side plans or plan B and C in case it does this or this, but two, it really took them off guard.
I feel they just didn't see this coming. And so it's forced them to make a total. Six hikes in a period of a year and a half. And that is rather quick. Now there's subtle Heights. There are a quarter percent, but nonetheless, I think they're reacting a little bit late. They should have had done something prior to this and they acknowledged that interest or excuse me, inflation was getting out of hand.
Sure. That being said, um, they also left the door open. Um, for tapering timelines to slow down or speed up and they left the door open for the number of rates. In other words, that's what they're penciling in. But if inflation continues to Mount, as they go through the steps, they might even accelerate the pace or the amount per rate hike.
So they've left that door open and it really illustrates how the federal reserve is acting. Are reacting rather than being proactive. Gary, do you think the economy is ready to absorb a rate hike right now next year, perhaps because I'm looking at the unemployment rate right now, it's 4.2%. Jay Powell has stated that maximum unemployment needs to be a prerequisite before he rates, uh, before he raises the interest rate.
And of course, OMI Kwan is now a concern all around the world. So are we. Well, that's an interesting question, but it doesn't have a clear cut answer. What we do know is a for example, in the United States, A number of new cases have spiked tremendously 120,000 per week. But the interesting thing is the predominant strain that is affecting people is Delta 3% of the cases reported.
And people going to the hospital are this new Omnicom. Now that they've seen that in certain pockets of the United States and they believe that that will begin, that will spread more and more. But the good news is it does seem as though that third booster shot makes their current vaccine effective to all of the variants, but it's going to come down to the fact that we are still in a pandemic.
Um, we've thought it ended last year. And then Delta came. We thought it ended this year as Delta began to wane, but now we're seeing, uh, the, an acceleration of new cases being greeted. So that is going to be troublesome and that will put pressure on the labor market. And I'm just wondering if a tightening of the money supply next year, which is invariably what, uh, interest rate hikes imply, if that will impact negatively impact the labor market unemployment has.
The unemployment rate has been steadily coming down since the outbreak of COVID-19. But if they reverse the, uh, easy monetary policies that they've instituted last year, it's possible that the unemployment rate could go back up. It is possible. I think that, um, the key right now in terms of looking at the, the unemployment rate itself, first of all, you've got to realize that one of the reasons it's gone down is there's been this huge transition of where people work from.
And the work at home has really helped out a lot. If the virus continues to wreak havoc, that will have an effect, but most important. The there's two effects that you get when you raise interest rates. The first one is the intended effect and that is bringing down inflationary pressures, but it also contracts the economy because as you raise rates, economic growth slows, if economic growth slow.
It's not hard to speculate that it's going to require less workers. If the economy is not growing at the pace in which they had hoped it would. So as they raise rates, we will get an effect to an economic slowdown. And to what extent that, uh, effect will be as an unknown, but you have those dual actions coming out of raising rates.
Okay. So overall then to sum up, what is your outlook on the economy for 2022? I think, well, I think that the economy given that we put some sort of handle on the pandemic because that's the big contingency will continue to grow. I think that as they start to raise interest rates, they're raising. Uh, as they raise them, the raising them in very small increments of quarter percent.
So it shouldn't have a dramatic effect on slowing the economy down. But if you get a combination where you continue to have this number of cases on a weekly basis globally, and you have interest rates going up that could slow the economy down, even. Okay, let's move on to the precious metals, then gold and silver.
Let's start with gold first. So rally in, uh, in, in the precious metals today, you've explained why already let's talk about your outlook for 2022. Can we break out of the range that we've seen over the last six to eight? Well, I think what we're going to see is without raising interest rates until the middle of the year, if inflation continues to spike higher, you will see gold react to the bullish side.
If inflation stays the same or moves down as they go through the tapering process, then you're going to see it still remain. Range-bound even move. This has been more than any year. And I've been doing this for 35 years, a headline driven market. Of course, mark has moved on a fundamental basis. They always have, but it is the headlines attended, jerk the market around so violently and we have gotten a lot of very interesting headlines this year.
If we get that same kind of action next. We could have that effect overall I'm neutral on gold. I think that it could trade under pressure with the caveat that if inflation continues to tick up and tick a Pyre, um, eventually you'll get some dollar weakness and you'll get a push in gold, but it's going to depend on the inflation rate.
What we had inflation rise this year. But like we discussed in prior episodes, the dollar also ticked up alongside of inflation, but you're saying that next year, this trend could reverse back to normal where we have a negative correlation. It is possible. The reason we've had such, such a, a strong dollar is the fact that yields were so low on us.
Debt instruments began to tick up. And of course that is bullish for the. But we did have many cases in the last couple of months where you had the dollar and gold moving in tandem. There were more days, of course, in which you had the normal negative correlation, gold moves up, the dollar moves down or more likely gold goes down because the dollar is going up.
We saw that a lot this week, but we could see a change in that. Again, it's all about what the inflationary pressures. Over the upcoming months. That's, what's going to critical in determining where the pressure is. Yellow metal goes on. Don't leave us hanging. Now, Gary, what is your outlook on inflation? I think it's going to continue to rise.
I think that parts of it are transitory such as the supply chain bottlenecks that will work themselves through. But I think a lot of the inflationary pressures are derived from items that are going to stay here. Um, oil did come down a bit, but now it's moving back up. The costs of food is still tremendously high.
Now you might say, well, as far as food goes, they have to transport it. So if gas is high, hard to find drivers, uh, you have those carrying costs and that's, what's taking food prices up. Wow. Food prices are mostly driven by demand and China is the biggest recipient of our grains, soybean, corn, and wheat.
And they're buying in huge quantities right now, and that is what's driving the market up. Plus you've had some weather issues in the Midwest in terms of corn, but I think that we're going to see inflation stay high or move even higher than current levels. And if that happens, we will see a corresponding move to the upside in gold.
It's going to move higher. Is it going to stay at. Levels or is it going to repeat what has happened basically in the late seventies to early eighties where inflation did rise, uh, sustain for a while, several years, and then come back down. We did not have double digit back then. We had double digit inflation, but we did, we did not have double digit inflation for two, three decades.
It was a temporary phenomenon. It was transitory. Correct. I mean, when you look back in the eighties, I think it hit as high as 14% in 1980, maybe 15, just shy of 15%. But the interesting thing is it took them three to four years to bring it down to around 4%. And what that tells me is even if the fed gets it right.
And they slowed down the rate in which inflation was growing to have it start to come down. This is going to be a, multi-year not a multi-month process. So higher inflation is going to be with us at least through 2024. Uh, I'll circle back to the metals and just a bit, but I like to sidetrack and talk about what the impact.
On the financial sector will be from higher interest rates and higher inflation. This is an anecdote I I've had from speaking to some of my colleagues and friends here in Canada, at least that, uh, Canadian banks are placing limits on your daily withdrawal rates. So let's say you you're able to withdraw $5,000 a day, uh, from your debit card and you want to increase that limit.
They're there. They're not letting you do that. Uh, and this is not just one or two isolated cases. This is a lot of. We're being refused. So it's not a particular person with a bad credit score or whatever. It's, it's, you know, different banks, different people, all being refused, uh, uh, raises on the limits. I wonder why that is.
We were discussing this, you know, amongst my friends and, um, I haven't personally read any news about this, so I have you witnessed anything similar down? Why? No. And I've heard of, uh, I haven't heard anything like that in the United States. When I'm thinking of plausible reasons for that, obviously there's something has to do with the liquidity of the bank.
Then the security reasons they said, you can't do this because of security reasons. Um, but yeah, keep going. I would think it would, it would have to do with liquidity reasons. It might be that, uh, the percentage they have out, typically a bank will have about 50% of their assets. On loans. If they're anticipating a turndown in the economic scenario or conditions, then they might be anticipating a number of those loans going bad.
And therefore, what did he would shrink? But it would be something I really would have to ponder upon it. We absolutely would be a liquidity issue. It might have to do with the, the central bank of Canada. Also not being as accommodative, but I CA I don't know. I have not heard that. Yeah, well, going back to the states now, do you foresee any such liquidity issues in the U S could that possibly happen?
Personally? I do not. The one thing that, that I frowned upon, but now I'm going to look at as a positive aspect of the federal reserve. They have such a huge balance sheet over $8 trillion. Liquidity is not going to drive. Because the fed has so much available to them. The fact that they're tapering adding more to it is not the same thing as reducing it, or even talking about the size of their balance sheet.
It's doubled what it was during the recession of 2009. Then 4.5 trillion is where it topped out. Also yesterday, I think. The government passed a bill in the United States to raise the debt ceiling to 31.4 trillion. It was capped, I believe at 28 trillion through Trump. And so our national debt continues to grow.
And those are the things that kinda keep me up at night. My concerns are the fact that we continue to fund bills with money that we don't have. And then don't have an answer to how we're going to repay that debt. The obvious answer is to have a very robust GDP Powell predicted, uh, GDP today. He believes it will come in at about 5.5%.
So it's nothing like what happened with Delta in the third quarter year. And in the first quarter we had 6.7 GDP, but GDP has got to be hugely robust to carry the weight of the burden we're placing on these huge debts that we are mounting with. And the United States continues to do that. Yeah. Well, assuming a $30 trillion of debt, uh, 10% of.
Would be three, what 3 trillion, Y percent of that would be 300 billion. So basically if you're increasing interest rates, by 1%, the average increase in your interest expenses should be $300 billion. And that's, uh, is that affordable? Do you think? I personally know I'm not, unless GDB GDP is at six or 7%.
Consistently throughout 2022, because that's where the money is coming in to pay these debts. My sense is that we were not going to have liquidity problems. What we have is a debt problem, and unless we begin to resolve that, we will have issues further on down the road. And that's another thing that could be a bullish factor for gold.
Right now. It's been under. Pretty much since it hit the highs of 2088 in August last year, it's been on a downward turn, a downward, a bias. And so I don't see that changing unless we get a fundamental shift in the root causes of what is taken gold. Okay, let's go back to gold and enclose it, uh, on gold and silver.
So your, your projections for gold, putting it all together. Do you have a price target for 2022? The next 12? What I'm looking? Yeah. What I'm looking at is key levels. Uh, right now it's back under 18. If it breaks, say 1755, it could go as low as 1700. If the dynamics turn and we get breaks above 1785. We could go to 1800, 1800 would take us as high as 1900.
My top end bullish projection for gold next year would be 1850 to 1900. My low end projection. If it continues to have a bearish move is got to be 1700. If it breaks 1755. Okay. And silver, how do you feel about. You know, silver continues to go under pressure could go below 20. If it continues to move the way that it has, it is typically been underperforming gold in terms of percentage gains on the way.
But most importantly, it's been over-performing gold on percentage gains lower. In other words, we saw silver break, the lows of November 3rd, November 3rd is when gold hit the bottom. It was that last FLMC meeting. We hit a bottom in gold. Gold did not break that low till recently, silver broken about a week and a half.
That low that it hit. And so silver could definitely be under more pressure than gold. I favor gold over silver. Okay. Favorite gold over silver. Do you think silver could break $30 next year? I think it will be difficult. Difficult. All right. Well, I appreciate your insights and your candor, Gary. Uh, always great talking to you.
Thank you for your outlook for 2018. You're very welcome and, and want to wish all of our viewers, a happy holiday season and a prosperous, but more importantly, a happy and healthy 2022. Those are the keywords I want to focus on because happy doesn't mean prosperity, but you also can't be broke to be happy and healthy and, and cherish each day.
What's that? What's that quote money doesn't buy happiness, but I'd rather take my chances. Um, money doesn't buy happiness, but poverty guarantees depression. That's the, that's the other quote, right. And it's true. It's true. You have to have enough to live on for any kind of happiness, but money in it of itself is not the answer, but you've got to be able to support your family and your endeavor.
Well, I, I appreciate, uh, everything you've done for our channel this year and in educating us and providing us with higher as higher levels of financial literacy. So happy holiday season to you as well. And to you, our audience. Thank you for watching. Kiszko happy holidays. We'll have more for you during our outlook series.